Creative concept retail and restaurants begin to surpass traditional retailers in Bay Area’s strong e-commerce market.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN OCTOBER OF 2016
By Jacob Bourne[dropcap]I[/dropcap]n August of 2016, Macy’s Inc. announced a move towards strengthening shareholder value and growth by investing in the highest potential brick-and-mortar stores and digital sales. In large part this strategy is primarily focused on evaluating the success of the physical retail channel, and the company’s conclusion that closing 100 of the 728 Macy’s stores across the country, most of which are scheduled to close in 2017, is mostly due to the declining sales volumes at those locations. One of those casualties is the flagship Union Square Macy’s Mens Store in San Francisco, which is up for sale and redevelopment.
“Macy’s is finding it challenging,” said Garrick Brown, vice president, retail research for the Americas at Cushman & Wakefield. “There has been immense pressure from Wall Street to close stores. My guess is that they will be closing more stores after the holidays. Nationally we’ve had a 15 percent annual e-commerce growth rate, but for brick-and-mortar it’s been close to 2.5 to 3 percent per year. Retailers are not doing well.”
Macy’s has company in the league of the nation’s traditional mall anchor tenants like Sears and JCPenny who are struggling in the changing economy. Hundreds of Sports Authority stores are shutting down while smaller mall retailers, such as Aeropostale and Ralph Lauren are struggling to stay relevant for a new generation of young consumers.
With the Bay Area’s economy running strong relative to many parts of the country, the plight of physical retailers has translated into other opportunities locally. According to Brown, the national vacancy rate for mid-2016 was 7.6 percent, however San Francisco’s vacancy rate is 3.5 percent. A retail tenant weeding process has been occurring, in which the closing of stores such as Sears, has opened up opportunities for landlords to subdivide floor plates into smaller spaces, easier to keep occupied.
Also, start-up online e-tailers who gained their prominence by creating brands with solely a digital presence are finding it necessary to provide a physical location where they can extend their brand and be more deeply connected with their customers. Chubbies (now with a physical location on Union Street in San Francisco), Shinola (in Jackson Square in San Francisco), Bonobos (on Grant Avenue in San Francisco) and Warby Parker (on Hayes Street in San Francisco) are just some examples of this transition from e-commerce to physical commerce.
Today, even casual dining seems to be emerging in areas formally traditionally occupied to retailers. “As stores close, landlords have been adapting,” offered Brown. “Big box power centers started bringing in food companies when stores closed. Food growth—restaurants and grocery—has been very robust. In April, and then again in June and July [of 2016], Americans spent more money dining out than eating at home for the first time ever.”
Although some casual chain dining and fast food establishments have experienced declining sales, newer players such as craft brewing restaurants have been growing in popularity. Migrating food trucks and food halls like the Ferry Building Marketplace and The Market at the Twitter Building in San Francisco have also gained traction among consumers.
“Older concepts are suffering to the new flavors of the month,” Brown added. “The pie got bigger but the number of hands reaching in grew as well. You’re starting to see a wash-out with the weakest places going.”
The reality of the changing retail market has impacted the various types of malls differently. While traditional malls are having to transform to survive, high-end and neighborhood-based destinations are thriving by comparison. Discount variety stores have found a niche amidst e-commerce growth by supplying inexpensive impulse-purchase merchandise that often doesn’t justify shipping costs for consumers. For goods and services that can’t be shipped, neighborhood shopping centers provide need-based options like hair salons, grocery stores and restaurants.
“Neighborhood malls are doing well in the Bay Area,” commented Jeff Badstubner, senior vice president, retail market lead for JLL who works out of the company’s San Francisco office. “Grocery-anchored, neighborhood malls have the highest occupancies and the highest asking rents. It’s a healthy sector. High-end malls are also doing really well and taking on expansive redevelopment growth projects while traditional malls are struggling to adapt by adding more open-air spaces and fitness centers. Unique retailers that can present products in an interesting way are doing well. With high-end retailers, it’s the experience of going there that drives the business.”
This transformation is occurring across the board, In an attempt to stay relevant, Target has introduced flexible-format stores that range in size depending on the location and its geography. CityTarget and TargetExpress are two new concepts that the Minneapolis-based national retailer is gearing toward high-density urban areas and features a wide variety of fulfillment options, some even using digital devices. New store locations ahead for 2017 include Marin City, East Palo Alto and San Francisco’s Stonestown Galleria, all in spaces 50,000 square feet or less. On October 5, Target held a grand opening for a 21,000 square foot flexible format store in Cupertino and heavily promoted job openings in the new stores, as well.