Bay Area Retail Industry Occupancy Rates Suffer Small Setback

Cumbelich & Associates, San Francisco, South Napa Marketplace, East Bay Bridge Center, Formula Retail Employee Rights Ordinance, Union Square
Courtesy of Clay Banks

Scott Anderson

John Cumbelich & Associates recently released their Q4 report on Northern California’s flagship retail power center inventory. It recaps a year in which modest leasing gains were achieved in most but not all Bay Area submarkets. However, obstacles still remain for the retail industry to mount a comeback to pre-pandemic levels. 

“We had been put into a government-forced shutdown for the majority of 2020 and consequently users went to the sidelines” said John Cumbelich, founder and chief executive officer of Cumbelich & Associates. “Clearly 2021 saw some recovery and some absorption of vacancy, but a lot of that was momentum-related.”

According to Cumbelich & Associates, between Q4 2020 and Q4 2021, the greater Bay Area marketplace saw the occupancy levels mostly rise, moving from 92.20 percent to 93.01 percent. 

However, by comparison, Bay Area retail inventory during the first quarter of 2018 stood at a staggering 97.16 percent occupancy level. Since that time, a steady increase in vacancy levels has been monitored. 

“The market began to have a big spike in vacancy in Q2 of 2020, which makes sense because in March that’s when the government shut-down occurred and for the ensuing five quarters we were in a very high vacancy paradigm.” said Cumbelich. “But if you look backward from Q1 of 2020 fully three years, we were [already] seeing a steady increase in vacancy. That’s because of the rise of e-commerce.”

Post pandemic, the market has been attempting to recover. The Bay Area’s Q4 occupancy level lost some of the positive gains it had made in Q3, as net vacancy grew by 60,000 square feet, which included three out of four of the Bay Area’s submarkets: North Bay, South Bay, and the San Francisco Peninsula. Yet even with the setback the Bay Area experienced approximately 105,000 square feet of net positive absorption for the year.

“We gave back a little bit of the leasing gains of Q3 in Q4” said Cumbelich. “I am going to be carefully watching. In 2022, I’m most interested to see if we see the breakout we saw in 2021, as users came off the sidelines [due to Covid] and if that holds.”

The highest occupancy rates for Q4 of 2021 was the South Napa Marketplace with 349,530 square feet at 99 percent, Vintage Oaks of Novato with 620,228 square feet at 98.91 percent and the East Bay Bridge Center with 453,500 square feet at 98.89 percent.

The largest vacancy rates in the area were at The Plant in San Jose with 650,532 square feet of total space vacant at 21.94 percent, 280 Metro center in Colma with 227,829 square feet of total space vacant at 20 percent, and Downtown Pleasant Hill with 345,687 square feet of total space vacant at 15.32 percent. 

According to the report, in order to regain the occupancy levels of early 2018, the Bay Area marketplace would need to absorb around 380,000 square feet of net new leasing. For reference, that would be the equivalent of 17 new Sprouts stores or over 100 new premium quick service restaurants. 

And as lockdown mandates became less stringent and vaccines were introduced, one loser from the pandemic clearly stood out to Cumbelich.

“In my opinion, the biggest loser in retail in the last two years…is the city of San Francisco,” said Cumbelich. “Most of the city’s problems are self-imposed…The old paradigm narrative in San Francisco was that it was this highly desirable, quote-unquote, glamorous city. And they were able to, as a board of supervisors as policy makers, to ask more of their retail and dining brands than other communities asked, in terms of siphoning off revenues from these users, for the favor of being able to come into their community and do business. That was primarily in the form of the highest minimum wage requirements in the nation…and the highest healthcare requirements for employers of retail and dining brands. That was already [the] cost of doing business in San Francisco.” 

However, according to Cumbelich, the city’s issues may have started in 2018 with the passing of the Formula Retail Ordinance.

According to the City of San Francisco’s website, the Formula Retail Employee Rights Ordinance helps regulate hours and scheduling for part-time employees of f retail establishments.  The law is applicable to retail locations with at least 40 stores worldwide and 20 or more employees in San Francisco. 

“I like to refer to [the ordinance] as ‘The Vacancy Creation Ordinance,’ said Cumbelich. “[The ordinance] said that the most proven brands, the most proven payers of wages, the most proven payers of rent, the most proven payers of sales tax, are not allowed to come into the city of San Francisco anymore without special permission.”

But that, according to Cumbelich, is not where the San Francisco legislators stopped creating hardship for the retail industry.

“And now the city passed in 2021, shockingly and I would say arrogantly, the tax on retail vacancies,” said Cumbelich. “There’s this mounting series of hurdles to make retailing and dining unviable in the city. And it’s all self-imposed. Now, you throw into all of that very challenging, very difficult mix a pandemic? Well, forget it. And that cannot be expressed better than in a boarded up Union Square, which is what they got.” 

Recently, there has been some activity in Union Square. For example, Chanel recently purchased the building at 340 Post Street in a deal finalized on Dec 20, 2021. The transaction was for $63 million, or about $3,537 per square foot.

On a positive note, the retail marketplace began to have some reasonable stability during the course of the year. This was due to some users that had gone into holding patterns during 2020 but were finally coming back in 2021. Brands such as Costco, Amazon, Sprouts and Safeway’s new e-commerce warehouses led the charge.

“I think the outlook for retail is fine,” said Cumbelich. “Retail services will still remain crucial. I think two of the things that we learned through the pandemic is, one, that [who] we call ‘essential retailers’ are indispensable in our society and are going to thrive no matter what. And I think another thing we’ve learned is that people really want to dine out.” 

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