First Street Napa reaches out to retailers amid battered mall landscape

Napa Valley Register
Written by: Howard Yune

As a growing number of malls – and the retail chains that once filled them – wither away, the man redeveloping Napa’s downtown shopping arcade is hoping to buck the trend.

Five years after acquiring the Napa Town Center, Todd Zapolski in recent weeks has announced the first few merchants and restaurants out of more than 40 he seeks to restock the nearly three-decade-old complex now branded as First Street Napa.

His drive to recruit food, clothing, cosmetics and other purveyors is moving into high gear amid mall failures and waves of store closures nationwide – and forecasts of more to come as the pushbutton, at-home ease of e-commerce steadily burrows deeper into American life.

How successful Zapolski’s transformed plaza becomes may depend on how sharply it breaks from the norms that have defined the master-planned, hermetically sealed shopping experience for more than half a century, according to analysts of the retail real-estate industry.

In the first years after its 1987 debut, the Town Center was a curious mix of open-air strolling with The Limited, Waldenbooks, Foot Locker, Claire’s Boutique and other middle-class standbys that filled sprawling suburban malls – but packed into a tight urban maze that limited its size and allowed for only one anchor department store. A generation later, however, the same limitations that once stunted its growth may prove its salvation, even as numerous indoor emporiums face mass vacancy, neglect or even the wrecking ball.

To complete that transformation, Zapolski, who acquired First Street Napa in 2012 and is partnering with Trademark Property Co. to redevelop it, aims to attract higher-line retailers that can woo Napa Valley tourists from downtown hotels – while providing a broad enough mix of shops, eateries and entertainment to also bring in Napa locals.

“We want to be destination, not a shopping center,” he said last week of First Street Napa, which is scheduled to reopen later this year at about the same time as the five-story Archer hotel directly east – one of his hoped-for funnels of fresh customer traffic. The redevelopment is valued at more than $200 million.

Success in Napa would be a counterpoint to a tide of news in the mall and shopping center business that, in recent years, has seen more than its share of cutbacks and closures.

Mall staples like The Limited, Wet Seal and other apparel chains have completely closed their doors since the end of 2016. J.C. Penney in February announced the impending shutdown of more than 130 stores, Macy’s readied to cut loose 68 branches, and Sears Holdings – the parent company of Sears and Kmart – began winding down 150 outlets, a month before the onetime No. 1 U.S. retailer released a financial report conceding “substantial doubt” of its ability to avoid eventual bankruptcy.

The pressure on the U.S. mall industry heralds a permanent shrinkage in a sector being squeezed by struggling department stores on one side and a booming e-shopping world led by, Cowen Research wrote in a recent report. Of the nation’s roughly 1,200 malls, as many as 300, a quarter of the total, are likely to close or be converted to other uses by 2027, Cowen analyst Oliver Chen said last month.

With middle-market retailers swamped by competitors selling similar goods for less money, stores and the shopping centers hosting them must stake out a clear identity to thrive, he said – either to audiences for whom value is king, or to those for whom the high-end shopping experience is as much a product as the home furnishings, leather goods or Swiss watches they buy.

Most of the crisis in the U.S. mall business, according to Chen, is concentrated in the so-called C and D properties, shopping centers that are older, smaller or in declining neighborhoods – and often are stuck hawking the same goods as mass discounters or Amazon.

“Our preferred investment strategy is to go high or to go low,” he said. “Consumers are gravitating to deep value like outlet malls or off-price stores, or the value you get at a Costco. Or else they’re buying luxury goods because it’s difficult to replicate online what a Tiffany or a Louis Vuitton does.

“It’s a combination of experience, service and product. As a shopping center operator, you need to create an experience, because the convenience of online is so significant. The bar is much higher now, because online shopping has disrupted the market completely because it’s more convenient to just skip the trip to the mall.”

In a contracting brick-and-mortar market, newcomers may have a tougher time than ever convincing retailers – especially national ones – to strike out into new markets rather than defending the ones they already have.

“He has a high hill to climb to convince national retailers to go to that location,” Mark Millman, chief executive of the Millman Search Group, a Maryland-based retail and real estate recruitment firm, said of Zapolski. “… Contacts and relationships are the biggest obstacle, making quality retailers understand who he is. In this day and age, they will be very cautious in deciding if he can deliver. Marketing is a day-in, day-out job.”

Zapolski noted the increasing competition for a shrinking number of would-be tenants during his half-decade owning, and seeking to restock, First Street Napa.

Retail chains “are trying to do fewer stores but bigger stores, in areas with a proven history of success for their type,” he said. “We believe Napa will be a successful location for these brands, but we have little track record for our market to give them that confidence that if you build it, they will come. … Their response is, ‘We are not a leader’ – which means they cannot afford a mistake. It’s the risk of either missing the opportunity or getting too far ahead of the marketplace.”

Progress toward filling the shopping plaza has been slow. Renovations began in 2013 a year after the purchase and Trademark Property in 2015 predicted the first new Napa tenants could open later that year, but two more years passed before the announcement of the first confirmed leases.

A part of Zapolski’s hopes for a full slate of shops comes from the very headwinds facing larger malls – for instance, attracting cosmetics sellers losing prized outlets at department stores that are closing en masse. “Their whole business model has to change too,” he said. “There is a ripple effect.”

First Street Napa’s future will not include McCaulou’s, the regional department store chain that once was its lone anchor and largest tenant. The store closed after the 2014 earthquake, and Zapolski is dividing its shell for smaller ground-level shops and upstairs office space, which he has begun leasing.

The departure of McCaulou’s, a minnow among chain department stores with only 10 outlets, is probably best for the Napa center’s future given the seismic shifts in retailing, predicted Millman.

“It wouldn’t hurt to have a major anchor, but if you fill the place with restaurants and quality retail, you’re fine,” he said recently. “The days of the traditional department store are winding down.”

The same small footprint that ruled out a bigger, more famous anchor store 30 years ago now works in favor of those reviving downtown properties like First Street Napa, according to Dennis Williams, managing director at Northmarq Capital, a San Francisco commercial real estate finance firm.

“If it’s smaller, you have more flexibility in reshaping it,” said Williams, who lectures on real estate development and investment at UC Berkeley’s Haas School of Business. “If it’s 20,000 or 30,000 square feet, then a lot of (new) formats can fit there. A J.C. Penney is 120,000 square feet; if you lose that big a tenant, then how do you backfill that? That is one really big challenge.

“With a smaller space, you’re starting from a good place.”

First Street Napa’s directors have cited numerous inspirations for its redesign including Marin Country Mart in Larkspur and The Grove in Los Angeles—all of them places that mix diverse storefront types that embrace city street grids rather than replacing them.

If any entity can become the shopping center’s engine, declared Zapolski, it must be the surrounding city core – including guests at the upcoming Archer hotel and the existing Andaz a short walk west. (His properties and leasing interests total more than 400,000 square feet over three blocks and also include the Beckstoffer and Dunne buildings on First Street as well as the Kohl’s department store building, which remains separately operated.)

“Our anchor is Napa; Napa is why people live there, come downtown and like to visit,” he said of its restaurants, tasting rooms and street life. “Being flanked by the Andaz and Archer, we have traffic generators there. There will be 500 people a night at those two properties, walking in and out. And with the office space (in the old McCaulou’s) you’ll have another 125 people a day – you have these activities repeating themselves and creating more traffic.”

Giving over the Napa emporium fully to smaller, more specialized shops also may create a backdrop for retailers most likely to find their audience in an Internet-driven world. Although online commerce accounts for about 10 percent of overall U.S. retail revenue, Williams said, that share shoots north of 30 percent for millennials, those born between the late 1970s and the mid-1990s.

“If your target (audience) is 21-year-olds it’s a tough road to hoe, but if you have an older demographic, their shopping habits are rooted in the past,” he said. “But with any high-priced apparel, you’re much less likely to buy it online.”

Despite the promise of visitors from two high-end hotels within walking distance, Zapolski seeks enough balance in its stores to attract a broad range of customers from near and far.

Among the more accessible brands at the reborn plaza will be Lush, a Britain-based chain of body lotions, creams and cosmetics that became one of the first two tenants publicly announced in April (along with Compline, a wine bar and restaurant).

“We’re not trying to be über-luxury; we’re not pigeonholing it to people with lots of money,” he said. “A $2 bath bomb from Lush is just as high-quality as a pair of Gucci shoes in its own way. Lush is very approachable; anybody can shop there.”

A third tenant, the Maris Collective boutique, was announced in May and will occupy 3,000 square feet at the base of the Archer Hotel, offering a selection of contemporary fashion brands.

As online sellers encroach on more and more retail categories, tying a once-utilitarian emporium like First Street Napa to a new audience of vacationers will become a necessity, according to Chen of Cowen Research – even given how vulnerable the holiday market can be to recession and economic stress.

“Tourism is very important to high-end shopping, so it’s a very good objective,” he said. “Tourists have purposeful shopping so it’s an important market to target, especially for luxury goods. A lot of luxury stores in New York City can have as much as 20 percent tourist penetration.

“It’s a good business to be in, but it puts you at risk. Tourism traffic flow can be dependent on exchange rates.”

The business of selling everyday clothing, food and supplies shifted out of downtown Napa and toward car-friendly Soscol Avenue and Trancas Street decades ago. In its place has followed a collection of eateries, boutiques and specialty shops – but Williams, of Northmarq, was cautious about how much tourists can prop up a large retail center, especially when the wineries that form Napa Valley’s main tourist draw are mostly to the city’s north.

“Part of the risk there is that downtown Napa has changed a lot from when I was a kid,” he said. “It’s more of a tourist destination now, but they talk about Napa County – and how many (visitors) go to the city, and how much money do they spend there? What is the potential there? There’s a lot more to offer now than even five or 10 years ago, but is there enough? I’m not sure there is.”

Zapolski, meanwhile, appeared sanguine about the outcome of his mall-transforming mission.

“The silver lining for us is that retail is going more toward our direction,” he said. “The projects that are being done are for those who want to go to destinations, (places) that are experiential in their location. So the Napa Valley and downtown Napa meet the check marks for what retail should do well to survive in the next decade.

“If we hang in there, we will get it.”

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