Posted almost 2 years ago

Douglas Emmett’s Redevelopment of the Sherman Oaks Galleria

Deal Summary

In 1997, Douglas Emmett, a real estate investment company specializing in Class-A office buildings, acquired the Sherman Oaks Galleria for $51 million in an off-market transaction.

The Sherman Oaks Galleria, which consisted of approximately 1,000,000 square feet of retail and office space, became a cultural icon during the 1980s after being featured in movies such as Valley Girl and Fast Times at Ridgemont High. However, by the early 1990s the mall and its retailers struggled as the mall's popularity subsided and customer traffic waned. To make matters worse, the 1994 Northridge Earthquake would accelerate the mall's decline, which would continue its downward spiral until the mall's 1997 off-market sale to Douglas Emmett.

Upon acquiring the property, Douglas Emmett hired Gensler Architects to envision and design a major renovation of the Sherman Oaks Galleria. The thorough $200 million repositioning strategy would include rebuilding, renovating, and repositioning the existing structures into what would be referred to as a lifestyle center, consisting of approximately 700,000 SF of office space supported by about 300,000 SF of retail space.

Following the renovation, rental rates at the Sherman Oaks Galleria doubled and occupancies climbed to above 99%. Today, the Sherman Oaks Galleria is a valued property in Douglas Emmett's real estate investment trust (REIT) and has been awarded the TOBY (The Outstanding Building of the Year) award by BOMA (Building Owners and Managers Association International.)

A Cultural Icon: The Sherman Oaks Galleria during the 1980s

Opened in 1980, the Sherman Oaks Galleria would soon after become a cultural icon after the interior of the mall was featured in the movies Fast Times at Ridgemont High and Valley Girl, which were released in 1982 and 1983, respectively. The movie, Valley Girl, which is credited with the creation of the socioeconomic stereotype of the "Valley Girl," became synonymous with the Sherman Oaks Galleria, which solidified the mall's position as the epicenter of teenage mall culture.

However, during the early 1990s the general public's endearment with the Valley Girl culture ended, and what once seemed hip and interesting, was now old and dull. Especially since malls are expected to provide entertainment and interesting experiences for visitors, coming across as old and dull is a grave sin. Despite the public's disinterest, the Sherman Oaks Galleria likely could have treaded water for another decade or so, but a combination of additional factors during the 1990s would lead to an irreversible decline.

screen-shot-2017-01-23-at-5-38-19-pm Pre-renovation photo of Sherman Oaks Galleria

The downfall: Robinson's, May Company, and the 1994 Northridge Earthquake

The 1992 Merger of Robinson's and May Company into Robinson's-May

The first primary challenge the Sherman Oaks Galleria encountered was the 1992 merger of the malls two anchors, Robinson's and May Company. Ever since the mall's opening in 1980, a Robinson's department store occupied the mall's southern anchor space and a May Company department store occupied the mall's northern anchor space. As a result of the merger, both anchor spaces were rebranded as Robinson's-May department stores. Robinson's-May's northern anchor store would consist of the men's and home department, and their southern anchor store would consist of a women's and children's department.

The mall's two identically-branded anchor spaces likely didn't arouse much of the general public's enthusiasm and excitement. Presented with all of the San Fernando Valley's shopping mall choices (Westfield Fashion Square, Northridge Fashion Center, and Westfield Topanga), there likely wasn't much of a reason to visit the only mall with just one department store brand.

The 1994 Northridge Earthquake

In the early hours of January 17, 1994, a 6.7 magnitude earthquake rattled the San Fernando Valley, resulting in over 9,000 casualties and $40 billion in estimated property damage. The earthquake, which is often referred to as one of the costliest earthquakes in the country's history, caused significant damage to both infrastructure and privately-owned buildings throughout the San Fernando Valley.

The Sherman Oaks Galleria emerged relatively undamaged by the earthquake, with the mall reopening just 11 days following the earthquake. However, the mall's anchor tenant, Robinson's-May, didn't fully reopen its stores until more than four years following the earthquake. Much to the frustration of the mall's ownership and the mall's smaller retailers, the third floor of Robinson's-May's southern anchor store wouldn't reopen until mid-1998. During the four year delay, most of the mall's third-floor tenants vacated due to the insufficient traffic on the mall's third floor.

Douglas Emmett acquires the Sherman Oaks Galleria for $51 Million

Three years into Robinson's-May's four-year reopening delay, Douglas Emmett acquired the Sherman Oaks Galleria for $51 million. The off-market transaction reflected a price-per-square-foot of just $51 for the mall's 1,000,000 square feet of retail and office space. Although seemingly low, the $51 price PSF was justified. At the time of the mall's 1997 sale, the mall's income, occupancy, and reputation were in a steep decline, with average rents at $14.65/SF/year (about 50% below market) and occupancy at just 78.3%. Counteracting the mall's downward spiral would require significant capital expenditures, several years of foregone rental income, and the successful implementation of a risky repositioning strategy.

Who's to Blame? Douglas Emmett Sues Robinson's-May, and Robinson's-May Countersues

After Douglas Emmett's 1997 acquisition, Douglas Emmett proceeded to clear out all of the mall's tenants so that it could implement its redevelopment plans. By 1998, the mall's occupancy had dwindled to approximately 40% and Douglas Emmett was now focused on forcing Robinson's-May to vacate both the south and north anchor spaces of the mall.

To that end, in 1998 Douglas Emmett sued Robinson's-May for its "unauthorized closure" of the third floor of its southern anchor store which lasted over four years, claiming that "virtually all the mall tenants located adjacent to the closed third floor ... have vacated the mall due to lack of customer traffic." Furthermore, Douglas Emmett charged Robinson's-May with failing to adequately staff and stock its stores, thereby further contributing to the mall's decline. Douglas Emmett's goal in suing Robinson's-May was to evict Robinson's-May so that it could proceed with its redevelopment plans.

Robinson's-May responded to the lawsuit by denying the charges and countersuing Douglas Emmett, charging that the mall's owners "failed to operate [the mall] .... in a manner which attracts retail customers and tenants to the Galleria." In its countersuit, Robinson's-May was seeking compensation for money that Robinson's-May had spent in developing, constructing, restoring, operating, and maintaining its two anchor stores.

Eventually, in January 1999 Douglas Emmett and Robinson's-May settled the lawsuits at undisclosed terms, with Robinson's-May winding down its operations and eventually vacating its anchor space by April 1, 1999. In less than 20 years, the Sherman Oaks Galleria had transitioned from a brand new mall, to a cultural icon, and finally into what would be described by the Los Angeles Times as a "moribund money-loser."

Douglas Emmett embarks on a $200 million rebuilding and renovation of the Galleria

Considering that Douglas Emmett was one of the largest Class-A office building owners in Southern California, it was widely assumed that Douglas Emmett would incorporate a significant amount of Class-A office into its redevelopment of the Sherman Oaks Galleria.

However, Douglas Emmett had quite the challenge to overcome, at least in terms of the how the public perceived the mall. In a LA Times Article about the mall's planned reopening, a local restaurant owner remarked, "Why didn't they just let it die?" In another instance, the president of the anti-development Sherman Oaks Homeowners Association described the Galleria as a "white elephant," pledging the notoriously anti-development association's support for the mall's redevelopment.

Douglas Emmett turned to Gensler's Architect's Santa Monica office to spearhead the design of the mall's redevelopment. In an interview with ArchNewsNow.com, Andy Cohen, the principal of Gensler Architects, explained Gensler's assignment:


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