Fashioning a Wholesale Recovery

By JESUS SANCHEZ

Oct. 31, 2000 12 AM PT

TIMES STAFF WRITER

Reaffirming the region’s prominent role in the fashion and design industries, Los Angeles’ top merchandise marts have staged a turnaround from gloomy recession days when tenants were bailing out and critics questioned whether marts had a future in the Internet age.

New tenants have boosted occupancy rates in downtown Los Angeles’ California Mart, the hub of Southern California’s apparel industry. At Pacific Design Center, new owners have begun a major renovation designed to bolster the West Hollywood property’s position as a center for high-end furniture dealers. In August, the downtown L.A. Mart, which features 13 floors of home accessory, furniture and gift wholesalers, became part of a nationwide chain of wholesale markets with a large marketing budget and strong industry relationships.

The renewed investment and activity in the three marts in part reflects the vitality and influence of the hundreds of Southern California fashion and design firms with showrooms in the giant buildings that are visited by thousands of store buyers.

“California is still a leading design venue,” said Carl Muhlstein at Cushman Realty, which brokered the sale of all three properties in the last year. “A lot of the [buyers] who come from Asia and Europe still want to come to L.A. for the design and culture.”

Investor interest in the properties was so strong that the L.A. Mart and the California Mart--popularly know as the CalMart--had virtually been sold even before the sales brochures were printed, Muhlstein said.

The properties have served for decades as the unrivaled meeting place where regional and national wholesalers from the fashion, furniture and gift trades presented their wares year-round to buyers from prestigious department store chains as well as neighborhood gift shops.

“It’s a touchy-feely business,” said Ilse Metchek, executive director of the California Fashion Assn., an industry trade group, and a former CalMart leasing director. “You’ve got to be here.”

The owners of merchandise marts play a more active role than other commercial real estate landlords, whose primary concern is often limited to leasing space, maintaining the building and collecting rent. In contrast, many merchandise-mart landlords maintain close relationships with tenants to promote the marts and to create a constructive mix of tenants. Mart owners must also have a flair for showmanship to stage events--such as fashion shows and seminars--that draw customers.

“It is commercial real estate, but it is also an operating business,” said Charles S. Cohen, who headed the investment group that purchased the Pacific Design Center a year ago. “We have to market the building to the design community so that it’s always in the forefront.”

Merchandise marts can be fast-growing, lucrative businesses for their owners. Vornado Realty Trust, which recently purchased the nearly fully leased L.A. Mart for $54 million, has seen the operating profits from its merchandise mart business grow by 15% to 20% annually, according to Jonathan Litt, a real estate industry analyst with Salomon Smith Barney. The firm’s holdings include the world’s largest wholesale market, the 4-million-square-foot Merchandise Mart in Chicago.

“The merchandise mart business has been a very successful entry for Vornado,” Litt said.

Special events can generate huge profits if they bring in outside wholesalers willing to lease exhibition space at premium prices, Litt said. “With each event, the profits go straight to the bottom line.”

The prospects of big profits and rapid growth led many real estate developers in the 1980s to build merchandise marts and expand existing facilities. In Los Angeles, the CalMart and the Pacific Design Center launched major expansions.

But the deep and prolonged economic recession of the 1990s forced many tenants at the Pacific Design Center and the other merchandise marts to close up shop. Owners of the CalMart eventually lost control of their property as occupancy rates fell and their debt grew.

The recession and the huge amount of overbuilding only compounded the problems triggered by the wave of mergers that swept the retail and apparel industries. Many wholesalers closed their showrooms and went directly to the shrinking number of national store chains. Large special-event trade shows in Las Vegas also captured the thunder of the year-round marts, and the Internet began to emerge as a potential rival that promised to bring buyers and sellers together in an efficient and inexpensive marketplace.

“You might argue that this kind of facility makes less sense” than it used to, said David Dale-Johnson, head of the real estate program at the Marshall School of Business at USC. “At the margin there are less people needing to go see the product.”

The 1990s proved a major shock to many developers and investors who suddenly realized that the merchandise mart properties were more complex and needed more attention than they could afford.

“What they didn’t realize was that it took a great deal of marketing and a lot of expense to drive traffic into the building,” said Mark Falanga, vice president of business development for Vornado’s Merchandise Marts Properties subsidiary. “It’s much more complex than writing a 10-year lease with an office tenant.”

The new set of merchandise mart owners operate under a more modest set of expectations. None, for example, say there is a need for more merchandise mart space in the Los Angeles area. Owners of the Pacific Design Center are marketing 200,000 square feet in what is known as the Center Green building as office space instead of wholesale showrooms.

“I believe they overestimated the demand,” Cohen said of the previous owners, which included real estate giant Catellus Development Corp. The only way to make the project successful, he added, is “by removing the excess capacity of showrooms.”

Only 10% of the showroom space is vacant now.

At the CalMart, some of the vacant space left behind by large apparel makers has been leased to a growing number of smaller manufacturers and fledgling design firms. New tenants include firms involved in textile technology and fashion-related Internet companies.

Despite industry and technological change, the owners of merchandise marts remain confident that buyers and sellers will still need a place to meet face to face.

“This business is based on touch and feel,” said Judah Hertz, whose company purchased the CalMart in May for an estimated $90 million. “Buyers will not write [an order] without seeing the quality of the merchandise, feeling the fabric.”

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Mart Mecca

The three largest wholesale merchandise marts in Los Angeles draw thousands of store buyers interested in stocking their shelves with apparel, furniture, home accessories and gifts.

Pacific Design Center

* Size: 1.2 million square feet

* Showrooms: 200

* Owner: Partnership headed by Charles S. Cohen and real estate fund managed by Cheslock Bakker & Associates

* Tenants: High-end furniture makers, fabric and floor-covering dealers, lighting and home accessories

California Mart

* Size: 2 million square feet

* Showrooms: 1,200

* Owner: Hertz Investment Group

* Tenants: Apparel makers, manufacturer representatives, fashion designers and suppliers

L.A. Mart

* Size: 720,000 square feet