As retail itself morphs, downtown Santa Cruz fine-tunes approach to filling empty spaces

Have something to say? Lookout welcomes letters to the editor, within our policies, from readers. Guidelines here.

Walk Pacific Avenue in downtown Santa Cruz and you can easily see the changes wrought by the 2½ years of pandemic. Many empty spaces catch your eye, and you might remember what used to be in them: Starbucks or Peet’s Coffee there, Palace Art & Office Supply here, even 99 Bottles beside an alleyway.

And you glimpse some new life, replacements like The Buzz Sushi at 1010 Pacific Ave. at Cathcart Street, across from Kianti’s; the sushi restaurant opened just a few weeks ago in the spot where Sweet Curls Rolled Ice Cream had a short-lived tenure.

The retail business is always a tough one, with one out of five new enterprises failing within their first year, and only about half making it past five years nationally.

Santa Cruz’s downtown, a people-watching magnet for locals and tourists in normal times, saw business owners and managers under immense pressure amid the pandemic.

Today, the holes in the downtown landscape number 15 commercial spaces, according to Santa Cruz Economic Development Manager Rebecca Unitt. That’s a slow improvement over time: 30 spaces lost tenants between 2020 and 2022, and half of those spaces have been filled, or will be soon.

All totaled, downtown — defined as the area bounded by Front, Cedar, Water and Laurel streets — contains 126 retail properties. These currently empty 15 storefronts total more than 39,000 square feet in available space, equaling a downtown retail vacancy rate of about 4%.

Finding tenants willing to commit to a commercial space has been no small task, with many business owners still clawing back after suffering major pandemic losses, or simply looking for different kinds of commercial space as the Amazon effect and online shopping in general have changed the nature of what we buy and how it is sold.

The City of Santa Cruz’s Department of Economic Development has been working in this landscape for years.

As it does so, it notes fast-changing retail trends in space demand and usage.

“A big challenge we see in downtown specifically and with the available spaces is that many are quite large,” Unitt said. “If they’re up to 3,000 to 4,000 square feet, it’s really not what businesses are looking for today.”

She added that the nature of online shopping has caused retailers to keep a smaller inventory on the floor, and they often look for a space of 1,000 square feet or less. Only two of the 15 empty downtown retail spaces are suited for such a development.

“Traditionally, larger retailers would go for those large spaces to keep a lot of inventory in store, but it’s much more affordable to have a smaller space, and it makes sense with how retail has changed,” said Unitt.

Large spaces are typically difficult and expensive to subdivide, and when coupled with other negotiations and the seemingly never-ending permitting puzzle, getting a tenant into an adequate space can take a significant amount of time.

Erik Barbic, Santa Cruz-based managing broker and owner of Sherman & Boone Real Estate, says this is a major reason why many of those big commercial spaces — which might seem like hot commodities — remain empty.

“You might be adding new facilities like bathrooms, and the landlord has to figure out what the leftover space looks like in the event of subdividing a large property,” said Barbic, who is the listed agent for some of the empty office and retail spaces downtown, including the site of the old Pacific Avenue Starbucks. “These days, tenants look for landlords to become an investor in their business by contributing with tenant-improvement allowances to help build out and customize the space, and that’s not something all landlords are in a position or willing to do.”

Barbic also said downtown real estate faces more challenges than other areas in the county, which results in somewhat higher vacancy rates.

“Being in a downtown is inherently difficult because of things like parking and a lack of attractions for families, so you don’t have a ton of people going down there to shop,” he said. “But it’s going to be interesting to see what’s going to happen with downtown’s redevelopment. There will be so many more people living there, and when that happens, that’s going to drive the retail uses.

“There’s a lot that’s going to happen there in the future with housing and the hotel plan, so as we get closer to those developments, the next question is how many projects can get financed?”

So as recovery continues and retailers and brokers alike adjust to the new demands of the current age of retail, you’ll see downtown storefronts come back to life slowly but surely.

However, the immediate future is undoubtedly poised to be a balancing act, says Unitt.

“It’s sort of a ‘chicken or the egg’ thing: The space isn’t quite teed up for a tenant, but also you need the tenants to figure out what they need,” she said. “It’s a weird dynamic, and you really have to find the perfect parking for them to take action.”

In the short term, the city’s economic development staff is focused on solutions to get more businesses into the empty downtown properties, even as more ambitious redevelopment plans, including new retail, take shape in the lower Pacific and lower Front areas. One plan is the Downtown Pops! pilot program, a vacant storefront activation program approved by Santa Cruz City Council in April 2021.

“The goal of it is to lower the barriers to entry for small businesses, really trying to target minority- and women-owned businesses and enable them to enter the downtown market,” Unitt said. “We want to allow businesses to be able to test their concept with a six-month lease, and if they’re successful, negotiate a longer-term lease with the space’s landlord.”

The program has since welcomed two businesses into the downtown landscape. Contemporary art gallery Curated by the Sea set up shop in 703 Front St., across from Trader Joe’s. The artist-run, high-end-accessory-boasting RREVV Gallery has taken over 1349 Pacific Ave., across from the Palomar Inn.

Obviously, the Downtown Pops! program is still in its infancy, and as it stands is focused on short-term recovery. The hope is that the program will open up chances for businesses to get a space downtown, and ultimately secure a permanent tenant for each vacancy.

“It’s definitely been an immediate recovery tool to directly facilitate some of those spaces being occupied and to help us learn what works best,” said Unitt. “As we’re gauging our success and working with these property owners, it could turn into a long-term program that we have as an ongoing resource.”