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Ghost Strip: The recession has left barren patches on the city's main drag

“For Lease,” “For Sale” and “Available Now!” signs dot numerous busineses along McHenry Avenue from Kiernan Avenue to Five Points. (Steve Kosko/The Modesto Bee)
“For Lease,” “For Sale” and “Available Now!” signs dot numerous busineses along McHenry Avenue from Kiernan Avenue to Five Points. (Steve Kosko/The Modesto Bee) Modesto Bee

A distracting array of "For Lease," "For Sale" and "Available Now!" signs mar Modesto's McHenry Avenue.

Vacant retail stores and empty parking lots dot virtually every block of that once-vibrant shopping strip.

Auto dealerships, beauty parlors, furniture showrooms, flower shops, electronic discounters and department stores have abandoned their McHenry buildings and closed for good. Gone, too, are many restaurants, title companies, mortgage brokerages and mom-and-pop shops that used to fill the shopping centers.

"If there has ever been a street that's felt the perils of the economic downturn, it's McHenry Avenue," lamented Tom Solomon, co-owner of Modesto's CoSol Commercial Real Estate. "There are so many prominent in-your-face vacancies there, like Mervyn's, Auto Plaza and the YMCA."

Modesto commercial real estate veterans can't remember it ever being this hard to attract retailers.

"There is 328,000 square feet vacant on McHenry, from Five Points to Pelandale Avenue. And that's just what is advertised on LoopNet (a commercial real estate Web site)," said Brian Velthoen of Velthoen Associates, a Modesto commercial brokerage. "We don't have a baseline of total square footage, but it's got to be in the 30 percent range."

A vacancy rate of less than 5 percent is the historic norm.

The former Mervyn's shopping center has become a virtual ghost town since the national department store chain closed four months ago.

Every retail store in the center has closed but one: Hy-Step Corner.

"When anybody pulls into the parking lot now, we know they're coming here," said Leon Smith, Hy-Step's manager. His store has been on McHenry for 40 years, and it has a loyal following of women seeking brand-name comfort shoes. "Our clientele weren't Mervyn's people. Of course, we don't get any walk-by customers now."

Walking along McHenry these days is depressing.

"It's just crazy right now," said Duke Leffler, who is in charge of PMZ Commercial Real Estate. He said virtually no retailers are moving into Modesto or expanding their stores. "If anything, people are looking at downsizing or closing."

The real estate downturn started nearly four years ago with the housing market. It spread to the office sector about three years ago, as housing-related companies -- such as mortgage, title and real estate companies -- began consolidating.

As office workers and construction crews lost their jobs, their shopping budgets shrunk. That caused retailers to go under, including big ones like Mervyn's, Circuit City, Linens 'n Things and most recently Gottschalks.

Small stores follow anchors

Once such anchor tenants disappeared, smaller retailers around them folded.

"A lot of businesses have been closing because they're frankly obsolete," said Mike Zagaris, who runs PMZ Real Estate. He said America doesn't need as many auto dealers as it has, and many retail products -- such as books -- now can be easily purchased on the Internet.

So who's going to fill all that vacant retail space?

"There's a challenge here because there's a mismatch between the physical assets on McHenry and the demands and needs of contemporary businesses," Zagaris said. "Whoever can figure out how to rehabilitate these buildings and transform them into better uses is going to make an absolute fortune."

Until then, building owners and their agents are struggling.

"Some of the properties I represent have been on the market exceeding a year, and I'm not sure when we're going to get the next proposal to lease them," said Greg Smith of Coldwell Banker Vinson Chase commercial realty in Modesto.

Even though interest rates are low, lease prices have dropped and selection is great, Smith said many prospective retailers decide potential profits are not worth the financial risk.

"Everybody is sitting waiting until we stabilize the economy and get confidence back in the market," Smith said.

Retailers struggling to survive now often can convince landlords to lower their rents by perhaps 25 percent or more, even though they're in the middle of a lease.

Those few businesses that are willing to sign new leases are getting some great deals.

"Not only are landlords lowering rents, but they're making a lot of other concessions ... like offering tenant improvements or months of free rent," said Steve White of CB Richard Ellis. "Landlords are being flexible because they know that even a reduced income is better than none."

Creative pricing

White said space in new shopping centers that a couple years ago leased for about $3 per square foot per month, plus taxes, maintenance and insurance, now can be leased for $2.25. He said space in older centers that used to lease for $2 to $2.25 per square foot now goes for $1.25 to $1.50.

"And those who own the properties free and clear can get even more creative with pricing," said White.

Because lease rates have dropped so much, he said, he is starting to see locally owned retailers in less-than-prime locations considering a move to active retail corridors like McHenry.

Some prominent older shops on McHenry now can be leased for 70 cents a square foot or less. Leffler said that's the case for the building at 214 McHenry Ave. that housed the Johnson Rug Co., which recently closed after 50 years in business.

But it is tough to convince banks to loan money for new stores, Velthoen warned. He doesn't blame the banks.

"With the deals they see, the lenders can't convince themselves they'll ever get their money paid back," Velthoen said.

Example: Velthoen said a 2,000-square-foot space leasing at $3 per square foot, plus 40 cents per square foot for insurance, maintenance and taxes, has to clear $6,800 a month just to cover the space.

"That's huge. You'd need to pull in $100,000 to $120,000 per month to clear that," Vel-thoen calculated. "Believe me, that's a lot of yogurt."

Modifying leases

When the economy was strong several years ago, retailers could make the sales they needed to be profitable. Now they can't, so many of them are asking landlords to modify their leases to help them survive the recession, said Solomon, of Modesto's CoSol.

"If your tenants aren't successful, what good are your buildings?" Solomon asked. With so much supply and so little demand for retail space, he said landlords increasingly are agreeing to lower rents midlease.

Attracting more retailers -- and the jobs they create -- is a communitywide problem that's going to take a concerted effort to solve, according to the commercial brokers.

"City Hall should be more business-friendly and focus less on minor compliance issues that burden local businesses. Also, local government should make it a priority to reduce fees to new businesses that are looking to locate or expand in our community," suggested Randy Brekke of Brekke Real Estate.

Velthoen said county, state and federal lawmakers also must do more to help.

"Our government is not attacking the problem right. You've got to stimulate private industry growth. You don't do that by raising the sales tax and the income tax ... and the county's new facilities fee," Velthoen said. "The government should go to each small-business owner and say: 'I'm going to give you a tax break for every new employee you hire.' "

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

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