New Town
Some say change is good, others say it's not.
Everyone agrees change is inevitable.
By Nathan R. Huff
Photographs By Kathy De La Torre
Everyone these days has an idea about what downtown Los Gatos is, was, will be or ought to be. Ask a tenant, whose rent has more than doubled in the last year, what is happening, and he'll say Los Gatos is rapidly becoming Valley Fair with a scenic backdrop. Ask another tenant who's faced a similar rent hike, and she'll say she's having her best year ever, and wouldn't move for the world.
Then turn to the landlords. One will say property owners--stuck with 5-, 10- and 20-year leases--have been the last in line to reap the benefits of the booming economy. Rents are significantly lower than similar retail areas, one will say. Another property owner, however, argues that even if a landlord can get double the rent from a new tenant, keeping long-standing stores in business benefits everyone.
Only one thing can be agreed upon by everyone--downtown is changing. For better, or worse, temporarily or forever, the last year has seen an abnormally high number of businesses closing and new ones moving in. The effects of Old Town and the chain stores it brought in are still being discovered and debated. Is it all part of the natural flow of capitalism, supply and demand? Or is Los Gatos' downtown in danger of losing it's unique charm and character?
According to the parade of Los Gatans lobbying against paid parking at the June 17 town council meeting, town character is very much a virtue worth fighting for. The council, voting 4-1 against paid parking, agreed that the possibility of destroying the character of the downtown with paid parking was too great a risk to take.
One change is indisputable, though. Rents have jumped all over downtown, and the phenomenon is spreading out to Los Gatos Boulevard and beyond. While many downtown commercial and office spaces are still being rented for what landlords term the "archaic" rates of $1.50 to $2.50 per-square-foot, new leases are double that in most areas of downtown.
In many ways, the commercial rental market is following the residential real estate market. According to some, it's even behind that aggressive market. But as property owners at places like Lyndon Plaza list office rentals at $4.75 to $5 per square foot, the rapid rate of rent escalation is unquestionable.
One of the two James Bond Galleries is closing, Hug-a-Berry, the Backdoor Boutique and Curious Book Shoppe are leaving or have left, and Gaps are filling the gaps. Banana Republic is here, and, according to an active downtown rumor mill, Williams-Sonoma, the trendy kitchen boutique, is preparing to set up shop on N. Santa Cruz Avenue. On the other hand, Four Green Fields, a new sushi restaurant and Pizza My Heart are among the recent local and regional arrivals. So, is downtown really changing all that much?
Michael Kane, who runs a money management business with a seven-member staff on E. Main Street, would say yes. He is packing his bags and moving to Los Gatos Boulevard. His monthly rent on E. Main Street is increasing from $2,300 to $7,500--up to $4.50 per square foot--and Kane is angry.
"It's not my mentality to gouge and screw," the 20-year Los Gatos resident says. "If I lose my business, what the hell is going to happen to my house?"
Michael Kane of the Kane Group on E. Main Street, will have to return the key to his landlord soon. Following a rent increase from $2,300 to $7,500 monthly, he is moving his Kane Group to Los Gatos Boulevard.
Kane said he was told last spring that the rent was going to $3.75 per-square-foot, and that he had to make a decision by June 1. When the date rolled around, Kane said he was still trying to figure out what to do. At that point, however, he was told the market rate had increased to $4.50 per square foot.
"Let there be no doubt," Kane will admit, "I had a very good lease for five years. But this has been a very steep curve."
Commercial rents have indeed taken a steep upward turn. At the Los Gatos Shopping Center on N. Santa Cruz Avenue at Highway 9, two spaces are vacant. The Water Store was the most recent tenant to pack up and call it quits. Other stores in the same complex--which isn't even considered prime downtown real estate--have faced, and swallowed, the same rent increases.
Jim Johnson, owner of Mountain Mikes Pizza, first considered following the Water Store's lead and leaving when he found out his rent was increasing 120 percent. But once he looked at the costs of relocating, he figured he'd just swallow it.
"We're going to bite the bullet," says Johnson, who had been renting month-to-month since his lease expired over a year ago. "It is tougher. I just have to watch my pennies a little closer."
Another business sticking it out--despite a five years of rent increases from $3,000 a month to $8,000--is Ford Cleaners, a veritable icon of Los Gatos. And even with the rising rents, the cost of cleaning a shirt remains virtually the same as it was seven years ago, when the Kim family bought the 80-year-old business.
Acacia Kim, whose parents own Ford Cleaners, says the family must continue to find new business while retaining virtually all its old customers. "It's pretty simple," she says. "Either you stay or you leave. Most people continue to come because we do a good job." Standing outside the historical facade of the Ford Cleaners building on N. Santa Cruz Avenue, next door to a "coming soon" sign advertising the arrival of gourmet pastry shop Pascal Janvier, Kim shrugs off a question on the profitability of the cleaners. "You mean successful by dry cleaners' standards?" she says smiling.
Across the street, landlord and Los Gatos Porch co-owner Larry Arzie dismisses the issue of rising rents. "Rents aren't high when you compare them to rents in downtown Palo Alto," he says, adding that the changes in downtown have a positive side to them as well. "Some of these business have been living off archaic rents--they would not be able to compete otherwise--maybe it's time for them to go."
Not that Arzie wants to see the corporatization of downtown. The always vocal Arzie says change, while inevitable, comes in different forms. These forms are expressed in landlord attitudes toward recruiting new tenants and retaining the old. Arzie says he brought in Smith and Hawkins at half of today's going rent with a 20-year lease because, while it is a regional chain, it is a local-serving business that was interested in making a commitment to downtown. Other longtime resident landlords have the same attitude, Arzie says. Not so with many "absentee landlords," Arzie maintains.
"Unfortunately when there is a new piece of property, what they're interested in is the highest price they can get," Arzie says.
And that price can be pretty high. James Bond, owner of the two James Bond galleries, is closing his N. Santa Cruz location and moving as much of his extensive inventory as he can into his gallery on E. Main Street.
Bond says it's not really the rent that's forcing him out, it's the landlord's demand that Bond make improvements to the old building. "I've put $50,000 into the building just to make it more acceptable," says Bond, who has been at his present location for 10 of the gallery's 22 years. "I'm not going to put three quarters of a million dollars of improvements into this building."
However, Williams-Sonoma reportedly might. Several sources said the kitchen goods chain was preparing to move in to the old building. A spokesman at the Williams-Sonoma corporate office would neither confirm or deny the rumors. The 70-year-old Bond, who says he'll "die with his boots on," is desperately searching for more space for an inventory he says could fill 500,000 square feet. He said he found another space downtown, but the landlord wanted $125,000 in addition to more than $4 per square foot.
Almost everyone agrees the only stores capable of making such financial commitments are chain stores that can afford to lose money for the first few years.
"Baby boxes are obviously knocking on the doors," Arzie says, "and as soon as they come in, all places command $4 per square foot."
Shoppers pack the popular Domus, with its eclectic mix of kitchen items, gifts and cards. Its back door is across a parking lot from Old Town which boasts several chain stores.
Longtime resident Margaret Smith, who owns the 35-year-old Domus store, says her customers say Old Town's introduction of a handful of baby boxes signaled a real change in the character of the town, not to mention the rents.
"Smaller independent businesses are no longer able to compete in this market," Smith says. "I know there is a place for chains, but I wonder if that place is in a town that purports itself not to be a city."
Without the purchasing power, profit margin and ability to survive unprofitable years, Smith says local businesses can't afford to gamble on Los Gatos. This, in turn, leads to chains filling the open spaces--chains Smith says lack the same connection to the community.
"I'm a stockholder in this town," Smith says. "I care what happens; I care what the parking structure looks like because I intend to get old in this town." Smith says chains aren't connected to local charities and service organizations in the same way longtime local businesses are.
Ginger Rowe, owner of the women's sports clothing and children's apparel store Time Out Clothing, says that despite rents, chain stores and new shopping areas popping up all over the valley, she is enjoying a "banner year." However she shares Smith's concern over the direction in which downtown is heading.
"My biggest fear is the dynamics of the community are changing, and, unfortunately, we can't stop change," Rowe says. Unlike Domus, which could soon become the oldest of three downtown kitchen boutique stores if Williams-Sonoma opens, Rowe says she indirectly benefits from the foot traffic generated by the Gap and Banana Republic.
Rowe goes on to acknowledge that a lot of people want to be able to shop at the Gap while not having to go to the mall. Hence, a handful of chain stores is healthy. However, as rents for vacant stores begin to match those paid by corporate chains, the mix could become unhealthy, she says.
"Some sort of mix is healthy, but I don't want to see it go overboard," she says. "We have to try and keep it a unique town, because that's what keeps it thriving."
The James Bond Gallery on N. Santa Cruz Avenue has lost its lease. Local merchants say the Williams-Sonoma kitchen boutique chain is moving in. The company's corporate office would not comment.
The Town Chamber of Commerce is stuck somewhere in the middle of things. While its purpose is to advocate the interests of business, a number of Chamber members fit into both property owner and store owner categories. Chain stores are also members, and their needs must be addressed, as well.
The Chamber is in the process of coming up with a packet of information for all new store owners and landlords encouraging long-term investments in the community. It is also exploring the idea of creating an inventory of businesses interested in space in downtown Los Gatos, should it become available.
"I think it's important for the town to be on the lookout for other great businesses that aren't necessarily chains," Rowe, a Chamber board member, says. However, she adds, the issue becomes more complicated when chains leave town. The large retail spaces they leave behind are difficult to fill with small businesses, which leaves other chain stores to fill the gap.
Councilwoman Linda Lubeck, a downtown tenant, says the conditions changing downtown, no matter how outlandish they may seem, are just another function of the marketplace. "It's supply and demand," the accountant says. "It's like any other marketplace. Things are going to come and go, and rents will go up and rents will go down."
However, Lubeck still believes that Los Gatos' downtown will never become an outdoor Valley Fair. Like Arzie, Lubeck says landlords who are connected to the community and their longstanding tenants are more flexible and look at the long term. Families such as the Farwells--from whom Lubeck rents--and the Bachigalupe's, who own several of downtown's larger retail and office buildings, work closely with their tenants, Lubeck says.
"The places that the locals own will be protected," she says. "[Those landlords] will protect their investment in a wonderful downtown by picking and keeping the right tenants."
Landlords were hesitant to talk about the issue for this story. Several agreed to speak, so long as they weren't identified or quoted. Some, arguing the supply and demand theory, remember a downtown when rents were 10 cents per square foot--and no one could find a tenant. Forty years later, rents may be $4 per square foot, but the location is worth a lot more.
Many landlords struggle to maintain buildings in an economy that has greatly increased the cost of construction and repairs, especially those with unrepaired damage from the 1989 earthquake. Trapped in long-term leases, landlords say their slice of the pie continues to shrink, while taxes and maintenance costs continue to rise.
Kent Cooper, a commercial leasing agent for Cooper and Co., says landlords are often unfairly made out to be the bad guys. Cooper remembers times when landlords had to offer months of free rent or substantial building improvements just to find tenants. With those memories in mind, landlords now want to minimize their exposure to potential loss by getting longer leases with the strongest tenants available.
He also seconds Lubeck's notion that rising rents are a function of supply and demand, and the increasing attractiveness of Los Gatos as a place to do business.
"It's built up over the years, and the market is becoming very tight," says Cooper, who specializes mostly in office and industrial leasing. "What it's going to do is refine the type of businesses that are coming in. It's very desirable to be here and, if there is a downturn, I have to believe this will be the last area affected."
Chong and Kyung Kim own Ford Cleaners which experienced a rent increase recently from $3,000 to $8,000 per month.
Sheri Lewis, executive director of the Chamber, says that while she is really concerned about the situation, there are no easy answers. "I don't know what to suggest," Lewis says, "but the end result of this is Los Gatos won't be the Los Gatos we know."
Lubeck doesn't see such a big threat. She points to the constantly varying mix of downtown stores. Downtown use to be full of antique shops, she says; now only a few remain. Ditto with nail care businesses. The biggest business in downtown now appears to be clothing, as evidenced by the number of dress shops and other clothing boutiques lining N. Santa Cruz Avenue and Main Street.
"We're not going to lose our uniqueness," Lubeck says, "we're going to lose a few stores."
Shirley Henderson and her daughter, Denise Harr, will tell you the same thing. One look at the eclectic, almost haphazard collection of antiques covering every square inch of the Antiquarium can make customers forget that two minutes earlier, they were picking up neatly folded stacks of khaki clothing at the bright, corporate Gap less than a block away.
The mother-daughter team is experiencing the antique store's best year ever. After 33 years of watching stores come and go, Harr says she doesn't worry so much about Los Gatos losing its character.
"Los Gatos is special and it's got something to offer," Harr, who admits she has a very benevolent, flexible landlord, says. "If anything [unique stores] will become shrines--they'll be resurrected."
Harr credits the booming holiday season to an ever-increasing sense of nostalgia, a feeling that can't be satisfied at a mall. She notes that two of the customers she was waiting on in the store were staying in San Jose while visiting from Florida. A downtown San Jose hotel referred the two men to the Antiquarium as the place to go for unique antiques.
Stores such as the Antiquarium, and a hodge-podge of other longtime, resident-serving shops will always offer an attractive, small town alternative to the mass produced, Harr says. "Ninety percent of the people who walk in, I know their name, their kids' names and their dog's name."
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