weekly feature | Jun 19, 2019 |
Showroom defections and foreclosure drama: Is DCOTA in trouble?

Design Center of the Americas has survived its share of ups and downs over the years, but is now facing a new gauntlet of challenges. In the midst of news that a major tenant, Kravet, has moved to the nearby South Florida Design District, the design center has been hit with debt trouble: On June 4, Wells Fargo filed a $172.9 million foreclosure suit on the 782,986-square-foot property in Dania Beach, Florida. The design center, a trio of buildings owned by Cohen Brothers Realty Corp.—which also owns and operates the Decoration & Design Building in New York, the Decorative Center Houston, and the Pacific Design Center in Los Angeles—reportedly notified the lender that it was in default on its loans in February. In addition, The Real Deal reported last week that a new appraisal of the building saw DCOTA’s property value crash from $250 million to $115 million. If the corporation defaults on the loan, the building would eventually be up for sale.

According to a former tenant, current tenants have been told not to worry and that business will continue as usual; they’ve also been told to expect more information in the coming days.

Best-laid plans

The loan at the heart of the suit was for $185 million, provided by German American Capital Corp. in 2005, when Charles Cohen bought the building for a then-unnamed sum. The purchase came on the heels of Cohen's lauded rehabilitation of the Pacific Design Center, which he purchased in 1999—as well as failed negotiations to purchase Chicago’s Merchandise Mart. But the building, like the industry at large, was soon battered by the recession; many of its tenants downsized or went out of business, while others moved out in the face of rents they say were too high. (The South Florida Business Journal reported that the property generated only $7.66 million in net operating income in 2018, versus $18.9 million when Cohen purchased the building in 2005.)

“[Cohen] paid top dollar [for DCOTA] because the market was humming along, the buildings were full, the Danto family [who owned the building before Cohen] had done a good job of filling those three buildings,” a former DCOTA tenant told Business of Home. The same tenant spoke to the challenges of negotiating to remain in the building following the recession. “People who had leases that were renewing, he wouldn’t come off the number [on the rent], and it forced a lot more bankruptcies, and forced a lot of people to leave the building.” The former DCOTA occupant says that many businesses with leases in other Cohen buildings “had their arms twisted,” and that renewing the lease at DCOTA was often a requirement to remain in the other Cohen design centers. “It was a loss leader for them. They knew they wouldn’t make any money there, but they had to stay if they wanted to be in New York, L.A. and Houston.”

Tenants flee high rents

Since 2012, several high-profile tenants have defected to a collection of industrial warehouses in the neighboring town of Hollywood, Florida. Stark was the first, opening a showroom one exit down I-95 from DCOTA. Scalamandré, now owned by Stark, moved next door shortly after. Others soon followed, including big hitters like independent showrooms J Nelson and Jerry Pair, which were once anchor tenants in DCOTA. As the collection of to-the-trade businesses took over 70,000 square feet of showroom space, the area was renamed the South Florida Design Park.

Today, the South Florida Design Park occupies nearly 250,000 square feet. Its newest member, Kravet, is actively packing up its DCOTA space and moves to Hollywood this weekend. Its new 13,000-square-foot showroom is slated to open on Monday; in addition to fabric, furniture, wallcoverings, carpet, trim, drapery hardware, lighting and decorative accessories from Kravet’s family of brands and the lines it represents in South Florida, the new space will offer breakfast and lunch, as well as two private conference rooms for client meetings.

“It’s an industrial warehouse district, which has now become the default design district because everyone needs a place to go,” says one South Florida Design Park showroom owner, whose rent fell 70 percent when their company exited DCOTA. “The scary part was trying to figure out whether or not people would come over there to shop, but they started coming right away. It doesn’t get as much walk-in foot traffic [as DCOTA], but it gets really good destination foot traffic. And it’s still not what I would call pretty, but the city of Hollywood has adopted it and is going to start supporting it with beautification, landscaping and signage.”

The design park is made up of multiple warehouse buildings; one of the advantages of the neighborhood, says one tenant, is that the buildings’ numerous owners lead to competitive pricing when it comes to rents. “It’s not a monopoly like a lot of these design centers,” the tenant told BOH. Member showrooms contribute to a tenants association that funds the advertising and marketing for the South Florida Design Park as a designer destination. The vitality of Los Angeles's La Cienega Design Quarter, which started as a collective of neighboring shops, provides an example of the potential for the design park to grow in prominence. “With enough density, we can start hosting regional events that will have more impact and draw,” adds the tenant.

Another former DCOTA tenant cites a similarly drastic rent reduction as the catalyst for making the move: “Design centers are worth the premium because they bring all of the vendors together and offer designers one-stop shopping,” they told BOH. “But the premium at DCOTA was much higher than what we could find on the street—I’m talking going from nearly $50 per square foot to single digits. We could spend more on build-out, show more product; we might have lost some business, but the cost structure was so much lower that we could be more profitable with fewer sales.”

New neighbors

Paired with the number of design businesses who pulled out of the region or went out of business altogether, the defections have taken a toll on DCOTA’s viability. Just as the South Florida Design Park was forming in 2012, the terms of Cohen’s now-defaulted loan were modified to include a lower interest rate; the maturity date was also extended to August 2017, and later March 2019.

To fill the building, Cohen has turned to corporate tenants. Online pet supply company Chewy.com signed a lease for 48,000 square feet in 2013, then expanded to take over 100,000 square feet in 2017. Banana company Chiquita Brands International signed a lease in 2015, and JetBlue is rumored to be moving into the building soon.

In 2015, Cohen told the Miami Herald that the building needed to adjust its focus. “It was overdeveloped for the design industry by about 200,000 to 300,000 square feet,” he asserted. “The area just doesn’t have enough high-end showrooms to fill the capacity. We realized we needed to position it marketwise to the office user who wants the amenities of a country club type environment.” (Cohen is no stranger to attracting an elite office clientele: In addition to the four design centers, Cohen’s holdings include the New York office properties 3 Park Avenue, Grand Central Plaza and International Plaza.)

In the same article, the Miami Herald reported that Cohen had invested more than $30 million in building upgrades; tenants at the time included an internet marketing firm, car rental company Avis Budget Group, a law firm, and augmented reality company Magic Leap. Cohen told the paper that while he planned to allocate 300,000 square feet for offices, the rest would remain devoted to showrooms. According to The Real Deal, the building was only 64 percent leased at the close of 2018’s third quarter. Though the building has 150 showrooms, the South Florida Business Journal reported last week that DCOTA has only 55 showroom tenants.

“I think the big question for someone like me is, Why would he not change his rent structure to keep the building full?” asks a former tenant. “New tenants like Chewy, they’re paying a fraction of what showrooms pay in rent. If he can afford to do it for them, why not for the industry?”

Riding out the storm

Despite the high rents, many showroom tenants have elected to stay put, like Joy Eber, owner of luxury outdoor furniture company InsideOut. After more than two decades in the building, she’s grateful for its amenities—and trusts that the building will ride out Cohen’s financial ups and downs. “I’ve had calls from designers asking, ‘How do you feel?’” she tells BOH. “I say that this isn’t the first time [Charles Cohen has been sued], and I have a strong feeling it won’t be the last. We’ve seen it before, so I don’t think it will be an issue. Charles is a very good businessman, and he will figure this out.”

As one industry expert told BOH, “Charles Cohen has holdings everywhere. Maybe he needs a big loss somewhere to offset a big gain somewhere else—a machination in a multibillion-dollar real estate empire. Who knows? One thing that’s absolutely true is that Charles could afford this if he wanted to.”

Though she’s been courted to join the South Florida Design Park, Eber intends to stay in the 4,000-square-foot space that she says has offered her so much opportunity—and value. “I see safety for my employees—a building that has guards, security, lighting in the parking lot—and that to me is worth a lot of money. And [while] shopping, I like to be under cover, not a lot of sun and rain. We were in the Miami Design District [previously], and it was great when the weather was good, but it wasn’t so great when it was raining. This is an [enclosed] building with valet service, and to me that’s a far more elegant way to shop.”

For these reasons, Eber says she’ll renew her lease next fall without challenging the rent, even if she negotiates other details like showroom maintenance. For her, decreased foot traffic is an inevitable result of outside factors, not the building’s problem to solve. “Ten years ago, people were not shopping on the internet. If I wanted to buy shoes, I’d run out to Neimans or Saks,” she says. “I don’t do that anymore, and design is the same. Physically, designers aren’t here [in the showroom] as much, but that doesn’t have anything to do with having a showroom at DCOTA or SFDP or anywhere else—it’s the nature of what’s happened to the business we’re in, and you have to make adjustments [to your business model].”

Despite the departure of some prestigious showrooms, DCOTA has also signed several big-name tenants in recent months, including Pierre Frey, Holly Hunt and Gloster. (The Rug Company celebrates its own grand opening in the building tonight with Luxe Interiors + Design.) And if some corporate offices are added to the mix, Eber sees that as a fact of life. “There’s a whole eyeglasses and ophthalmology department in the Saks in Boca Raton,” she explains. “This is part of survival. Sure, I’d love to see more furniture showrooms coming in, but if they’re not strong enough, I’d rather see [the building full].”

Homepage image: Design Center of the Americas

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