| CAL­I­FOR­NIA DREAMER

With Amer­i­can malls on life sup­port, Los An­ge­les real es­tate bil­lion­aire Rick Caruso is thriv­ing as the Walt Dis­ney of shop­ping. Now the devel­oper be­hind The Grove and other re­tail won­der­lands is dou­bling down on his suc­cess­ful model by con­tin­u­ing to embr

Forbes - - CONTENTS - By sa­man­tha sharf

With Amer­i­can malls on life sup­port, Los An­ge­les real es­tate bil­lion­aire Rick Caruso is thriv­ing as the Walt Dis­ney of shop­ping. Now the devel­oper be­hind The Grove is dou­bling down by con­tin­u­ing to em­brace the past—while learn­ing the lessons of e-com­merce.

To un­der­stand The Grove, the 575,000-square-foot shop­ping Xanadu in cen­tral Los An­ge­les, let its owner, Rick Caruso, in­tro­duce you to its neigh­bor, the iconic Farm­ers Mar­ket. He takes you to a butcher stall where, some 80 years ago, Caruso’s fa­ther was sweep­ing the floor. Next he points to a pizza stand founded by Patsy D’Amore, who baked L.A.’s first pie in 1939. “I grew up on his knee,” he says. Dap­per in a cus­tom suit and red-and-black-striped tie, Caruso weaves his way through the chaos, fre­quently stop­ping to ask mer­chants, “How’s busi­ness?”

It’s the same ques­tion Caruso asks of his own ten­ants, who have put this 59-yearold real es­tate devel­oper on The Forbes 400 at No. 179. While the Farm­ers Mar­ket is gritty and authentic, The Grove is the pin­na­cle of ar­ti­fi­cial grandeur, where ev­ery de­tail mat­ters. The cop­per garbage-can lids are pol­ished. If a child drops an ice cream cone, a se­cu­rity guard will swiftly ap­pear with a fresh scoop. Male em­ploy­ees must wear ties un­less the tem­per­a­ture tops 85 de­grees. Caruso ob­sesses over the po­si­tion­ing of trees, which ar­rive on his prop­er­ties fully grown. A prac­tic­ing Catholic, he be­gins plan­ning for Christ­mas a year in ad­vance and started his own Santa staffing busi­ness be­cause the agency op­tions didn’t meet his north of the North Pole stan­dards.

And af­ter all these years, Caruso hasn’t for­got­ten the lessons he learned grow­ing up around the Farm­ers Mar­ket. “If you pro­vide some­thing that is unique and rel­e­vant, in a set­ting that peo­ple find captivating, you will do well,” he says. “Re-

tail has got­ten side­ways be­cause it be­came the com­mod­ity. It is not about be­ing high tech; it is about un­der­stand­ing what your cus­tomer wants.”

The num­bers sug­gest Caruso knows that les­son well. The Grove’s 58 stores and restau­rants wel­comed 20 mil­lion visi­tors last year, more than the Great Wall of China or Dis­ney­land. Its $2,200 sales per square foot puts it be­hind only Mi­ami’s Bal Har­bour Shops in the United States. Amer­i­can malls av­er­age about an 11% va­cancy rate (ex­clud­ing an­chors), but Caruso says The Grove has a three-year wait­ing list. Most of the in­dus­try gives away space to glam­orous an­chor ten­ants; Caruso gives noth­ing away and also takes a per­cent­age of sales.

“You pay more, but you get more,” says Rocco Basil­ico, who runs re­tail for Ray-Ban in North Amer­ica. He says the brand’s tiny Grove lo­ca­tion has the high­est sales per square foot of any of his U.S. stores. The Grove’s Do­minique Ansel bak­ery (of cronut fame) does more busi­ness than the New York orig­i­nal, and the movie theater, which Caruso op­er­ates, is among the ten most pro­duc­tive per seat in Amer­ica.

The Grove and his nine other lightly mort­gaged shop­ping cen­ters in the area have made Caruso worth $4 bil­lion. Caruso hopes his four chil­dren, ages 18 to 28, will take over the em­pire one day. He has hid­den like­nesses of his kids across his prop­er­ties—fam­ily Easter eggs that the av­er­age shop­per would never rec­og­nize but for which he has great pride.

If all of this suc­cess seems to con­tra­dict the fur­ther de­cline and fall of brick-and-mor­tar re­tail in 2018, there’s good rea­son. Caruso is among a few op­ti­mistic devel­op­ers bet­ting—at least un­til Ama­zon can de­liver hu­man in­ter­ac­tion— that stores will con­tinue to pay off. In­deed, Caruso in­sists that Ama­zon is great for his busi­ness. On­line re­tail­ers un­der­stand their cus­tomers, he says. His job is to un­der­stand the cus­tomers at his malls.

WHILE RICK CARUSO Wasn’t born into a real es­tate dy­nasty, he seemed des­tined for en­trepreneur­ship. His fa­ther, Hank, went from sweep­ing up at the Farm­ers Mar­ket to start­ing Dol­lar Rent A Car. (He sold the com­pany in 1990 to Chrysler for a re­ported $80 mil­lion and died last year at 95.) Hank gave Rick, who got de­grees in busi­ness at the Univer­sity of South­ern Cal­i­for­nia and law at Pep­per­dine, his first taste of real es­tate by hav­ing him buy land in south­ern Cal­i­for­nia and lease it to the car rental op­er­a­tion. When Rick lost his job in 1987—the law firm em­ploy­ing him col­lapsed fi­nan­cially—the tran­si­tion to a new ca­reer was rel­a­tively easy.

Caruso tried his hand at in­dus­trial real es­tate, but it bored him. In 1992 he turned to re­tail with 333 La Cienega, in L.A.’s Bev­erly Grove neigh­bor­hood. He leased it to now-de­funct Loehmann’s for two decades and is cur­rently re­de­vel­op­ing the land as a mixed-use project sched­uled to open in 2020.

With ev­ery new prop­erty Caruso opened through the 1990s, he ex­panded the con­cept of what a shop­ping cen­ter could be. The En­cino Mar­ket­place in­tro­duced green space and a fountain. The Prom­e­nade at West­lake was curved so you could see where you were head­ing as you walked. “Devel­op­ers would build straight or flat be­cause it was less ex­pen­sive,” ex­plains Caruso, who still con­sid­ers him­self a bit of a real es­tate out­sider. For the Com­mons at Cal­abasas, Caruso hired a Hol­ly­wood set de­signer.

With The Grove, which opened in 2002, Caruso fi­nally put to­gether all that he had learned. He got in­spi­ra­tion from Charleston, South Carolina, and Sa­van­nah, Ge­or­gia, trans­lat­ing wide streets and low build­ing heights into his new open-air shop­ping cen­ter, where a green-and-gold trol­ley de­signed by one of Walt Dis­ney’s Imag­i­neers shut­tles visi­tors the quar­ter-mile from one end of the mall to the other.

The Grove’s com­mon area adds up to an acre. Com­peti­tors scoffed at the wasted space, but a movie stu­dio re­cently paid $600,000 to use it for a two-day stunt. A paid pro­mo­tion this sum­mer in­volved a gi­ant Ama­zon box, a Jeep Wran­gler and the lat­est Juras­sic Park re­boot. Caruso earns an es­ti­mated eight fig­ures in an­nual rev­enue from ad­ver­tis­ing at The Grove, ac­cord­ing to in­dus­try sources.

“As a com­pany, philo­soph­i­cally, we are in the hos­pi­tal­ity busi­ness,” he ex­plains. Empty stom­achs and full hands are among the main rea­sons shop­pers leave a re­tail prop­erty, so The Grove has 25 concierges to make din­ner reser­va­tions and bring pack­ages to shop­pers’

cars. Caruso claims visi­tors stay for an av­er­age of three hours—the in­dus­try norm is 90 min­utes—and 93% of them make a pur­chase.

Mall skep­tics say frills cut into profit mar­gins. But some of the big­gest com­pe­ti­tion is com­ing around to Caruso’s way. West­field re­opened a 1.3 mil­lion-square-foot prop­erty in Cen­tury City last year af­ter a $1 bil­lion ren­o­va­tion. The prop­erty, about five miles west of The Grove, fea­tures land­scaped out­door plazas with lounge ar­eas, concierge ser­vices for stylists and cos­tume de­sign­ers, and open space for con­certs and film screen­ings. “What Rick Caruso has done is where re­tail­ers are head­ing,” says Indy Kar­lekar, man­ag­ing di­rec­tor of real es­tate in­vest­ments for Prin­ci­pal Global In­vestors and an L.A. res­i­dent.

In Sep­tem­ber CaruSo opened Palisades Vil­lage, a circa$200 mil­lion mall in Pa­cific Palisades, an af­flu­ent area on the west side of Los An­ge­les. When 7-year-old So­phie Her­ron learned that the nearby Baskin-Rob­bins was clos­ing, she started a pe­ti­tion with lo­cal kids to save the shop. The move­ment failed, but when Caruso re­ceived her pe­ti­tion and video, he knew just what to do. In Sep­tem­ber, Mc­Connell’s Fine Ice Creams, a 70-year-old brand from nearby Santa Bar­bara, opened its sixth shop in Palisades Vil­lage, just min­utes from Her­ron’s doorstep.

This, Caruso be­lieves, is the fu­ture of re­tail. Good re­tail­ers—and by ex­ten­sion good re­tail devel­op­ers—cater to the com­mu­nity. “That is why Ama­zon has done so well in the book busi­ness,” he ex­plains. “They cu­rate the se­lec­tion based on the data they have from that neigh­bor­hood.”

Not ev­ery com­mu­nity has wel­comed Caruso with open arms. He was re­cently forced to scrap plans for a 200-acre mixed-use project in Carls­bad, near San Diego, af­ter res­i­dents re­jected his pro­posal for its en­vi­ron­men­tal im­pact. The res­i­dents of the Palisades have also ex­tracted, be­sides an ice cream store, some more costly con­ces­sions: an ex­tra level of park­ing in the un­der­ground lot, a 1,100-square-foot com­mu­nity cen­ter and re­designs for shops abut­ting a res­i­den­tial street so its home­own­ers (who paid as much as $5.7 mil­lion) could for­get they were look­ing at a mall.

At Palisades Vil­lage, Caruso com­bines 48 small high­end stores and restau­rants with eight lux­ury res­i­den­tial rental units. Forty per­cent of the mer­chants are firms that started out in e-com­merce; in­deed, six have never had a brick-and-mor­tar store be­fore. A prime cor­ner lot houses an Ama­zon Books. “We could take the whole Palisades project, the re­tail por­tion of it, and put it in­side the Nord­strom at The Grove,” Caruso says.

Caruso made his first big move into res­i­den­tial de­vel­op­ment in 2012 with a glam­orous 87-unit rental prop­erty, opened his first of­fice build­ing in 2016 and is now de­vel­op­ing his first ho­tel, Rose­wood Mi­ra­mar Beach Mon­tecito, a five-star re­sort that’s tak­ing reser­va­tions for Jan­uary 2019. Ev­ery Wed­nes­day, Caruso leaves his es­tate in Brent­wood and flies up the Cal­i­for­nia coast to visit the new ho­tel. A part­ner­ship with Rose­wood Ho­tels & Re­sorts, the prop­erty will have 161 rooms be­gin­ning at $695 for open­ing night, but even here, Caruso is lean­ing hard into the idea of com­mu­nity. Un­like many high-end re­sorts, the cam­pus will be open to the pub­lic, invit­ing lo­cals for movie nights and beach bar­be­cues, as well as to shop at the sec­ond store for Gwyneth Pal­trow’s Goop brand.

Aboard his pre­ferred dual-en­gine Siko­rsky S-76 he­li­copter, Caruso turns into a tour guide, ex­plain­ing the science of fog, call­ing out Venice Beach, Zuma Beach, the Getty Villa and Mal­ibu’s his­tory as a dairy farm. There’s also the house he owns on the beach in Mal­ibu and In­vic­tus, his 215-foot yacht. The boat’s name comes from Wil­liam Ernest Hen­ley’s 1875 poem—“I am the mas­ter of my fate. I am the cap­tain of my soul.” Caruso’s kids chose it.

When he’s not fo­cused on real es­tate, Caruso re­mains de­voted to his alma mater. In May he be­came chair­man of the USC board of trustees. He is lead­ing an in­ves­ti­ga­tion into al­le­ga­tions of nearly three decades of sex­ual mis­con­duct by a gy­ne­col­o­gist and the school’s han­dling of the claims. That will make him more vis­i­ble, al­though Caruso and his wife, Tina, a for­mer swim­suit model, are al­ready pretty well known to celebrity watch­ers in Cal­i­for­nia.

Such a high pro­file has po­si­tioned Caruso well to run for mayor of Los An­ge­les in 2022. Al­though he hasn’t made any pub­lic dec­la­ra­tion of his in­ten­tions, he ad­mits he’s se­ri­ously con­sid­er­ing it. When it comes to his prop­er­ties, no de­tail is too small or ex­pense too big, so it’s dif­fi­cult to see how that phi­los­o­phy would play in city hall—let alone in Sacra­mento or Washington, D.C. (If the real-es­tate-devel­oper-turned-politi­cian sce­nario sounds fa­mil­iar, don’t tell Caruso. The sug­ges­tion that he has any­thing more in com­mon with Don­ald Trump than be­ing an Amer­i­can alive in 2018 mor­ti­fies him.)

Loath to be type­cast, the right-lean­ing Caruso has sup­ported Democrats, in­clud­ing Cal­i­for­nia gov­er­nor Jerry Brown. In 2016 Caruso do­nated $244,600 to New Day for Amer­ica, a pro-John Ka­sich su­per-PAC. Dur­ing the cam­paign, he even joked that Trump was banned from The Grove. (He wasn’t.) And while the pres­i­dent may be wel­come, Caruso did bar boxer Manny Pac­quiao from vis­it­ing The Grove for mak­ing anti-gay com­ments days be­fore a sched­uled tele­vi­sion ap­pear­ance on the prop­erty.

To­day, Caruso says, ev­ery­one is wel­come at The Grove. Af­ter all, it’s good for busi­ness.

IF THE REAL-ES­TATE DEVEL­OPER-TURNED POLITI­CIAN SCE­NARIO SOUNDS FA­MIL­IAR, DON’T TELL CARUSO.

mak­ing a splash: rick Caruso at his sig­na­ture prop­erty in Los an­ge­les, the Grove. at 3,400 square feet, the danc­ing fountain is larger than the av­er­age amer­i­can home.

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