Mervyn's is trying to maintain its market share in San Jose after a long streak of shuttering 82 stores in 10 states.

The privately held, Hayward-based discount chain has leased a former 70,000 square-foot Pak'nSave site, located at 345 N. Capitol Ave. near McKee Road, from landlord Safeway Inc. on San Jose's underserved East Side.

"There's a lot of interest in former grocery store sites," says Terranomics partner Mark Koenig, one of the lead brokers on the deal. "Second-generation space is also more lucrative, due to the tightness of the market. This deal is a good example of that." Terranomics, the retail brokerage division of San Jose-based NAI BT Commercial, represented Mervyn's in the transaction.

Mervyn's has not announced the deal.

"There is nothing I'm prepared to announce at the moment," says Leanne Furman, a spokeswoman for Mervyn's. "But the store is looking for more locations in Northern California." Mervyn's currently operates 29 stores in the nine-county Bay Area -- the planned East Side store would be the chain's 11th location in Silicon Valley.

Construction has begun on the North Capitol Avenue store. "It's going to be a Mervyn's," says on-site construction employee George Valentine, pointing to the sand-colored building sandwiched between Dollar Tree and 24 Hour Fitness. "It's been in construction for at least a couple of weeks."

The retail play may be the result of the sale of one of Mervyn's East Side stores a year ago. The discount retailer operates a pair of stores in San Jose -- one located on 1375 Blossom Hill Road and another on 2855 Story Road (Mervyn's East Shopping Center). Home Depot U.S.A. bought the 114,461-square-foot Mervyn's East Shopping Center in January 2005 from Mervyn's East Partners.

"The existing structure [Mervyn's East Shopping Center] is pretty old," says John Machado, a senior vice president of Boston-based Colliers International. Colliers' San Jose office represented the sellers. "Mervyn's plans to re-locate their site to Capitol, near McKee."

The Story Road location has to shut its doors before October 25, 2007, the expected date Home Depot is planning to launch, according to Home Depot spokeswoman Romelia Edwards. The city granted the large Atlanta-based retailer a permit on April 24 to build its fifth San Jose store.

In the '50s style shopping center, located just a couple of miles from the proposed North Capitol Avenue store, there are a small group of tenants, including Mervyn's, Goodwill, Rosa Dental and a handful of small Mexican stores.

"Business seems to be tougher," says Sonia Urbina, an employee of Rosa Dental, one of the center's tenants. "There aren't a lot of cars in their [Mervyn's] parking lot. Home Depot could be a good thing."

"The Capitol site is going to be better for Mervyn's," Mr. Machado adds. "There are larger tenants there. It's a much better mix."

Shifting its focus to "better tenant mix" may be part of the company's strategy to focus its energy on profitable stores in Northern California.

Mervyn's pulled out of Oregon and Washington state last January, shuttering 20 stores in the second round of closures since September 2005. Last September, the company announced plans to close 62 underperforming stores, resulting in the loss of 4,800 full-time and part-time jobs, in Michigan, Oklahoma, Colorado, Louisiana and Texas, Southern California, Oregon and Utah.

"No stores closed in Northern California," Ms. Furman says. "It's a profitable area for us."

The retailer has already begun a multimillion-dollar project, the largest in more than a decade, in eight states (including California) that includes opening more stores this year and re-modeling its existing 170 stores.

"Mervyn's capital is in their core business, not the real estate," says industry source Bernie Haddigan, national director of Marcus & Millichap's National Retail Group.

On a local scale, that means chasing shopping areas that offer stronger tenant mixes. The planned North Capitol Avenue store is near the VTA Alum Rock stop, larger retailers like top competitor Target just across the street and a number of small Mexican and Asian-themed businesses. The complex also pulls in more dollars from East Side shoppers who are looking for one-stop shopping.

"I could use a Mervyn's here," says Reola Laury, a customer shopping in Dollar Tree. "I can shop here and at Target in one shot. It means one less trip for me."

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