Bay Area Retail Leads National Recovery

Sharon Simonson

San Francisco and the South Bay are among the top 10 healthiest retail markets in the nation, according to a new report from ChainLinks Retail Advisors, a network of retail brokerages nationwide including Northern California’s Terranomics.

San Francisco is considered the second healthiest market in the country, behind only Washington, D.C. The South Bay ranks sixth, behind New York City, Boston and San Diego.

The rankings take into account a variety of economic and property-level indicators including regional employment rates, income growth, overall property vacancy rates and retailer demand to expand in a given market.

“Though the San Francisco market currently has unemployment levels above the national average, the city’s already tight vacancy levels, high retailer demand and expected strong job growth in 2011 helped to propel it to number two on our list,” according to the report.

San Jose and the South Bay had a shopping center vacancy rate of 7.3 percent at the end of last year on an inventory of 31.7 million square feet. That was up from a vacancy rate of 6.2 percent at the end of 2009. But average asking rents still rose in the year by 3.8 percent.

In San Francisco, the retail vacancy rate at the end of last year was 4.8 percent on an inventory of 10.2 million square feet. That was up slightly from the year before; however, asking rates still rose nearly 7 percent.

Coastal California’s high rankings were strongly driven by merchant demand to exploit cheaper leasing costs in those markets, said Garrick Brown, research director for Terranomics and the author of the report. “Even though there is 10 percent unemployment, the attitude of retailers is, ‘We need to move now to get cheap rents,’” Brown said. Current unemployment rates are less of a concern because there is confidence the economy will regain its strength, he said.

Personal income is expected to grow 2.9 percent this year in San Francisco after less than 1 percent growth in 2010. It is expected to rise 3.3 percent in the South Bay, on top of 1.9 percent growth last year.

New York City ranked behind San Francisco even though unemployment in the Big Apple is 8.5 percent and personal income grew nearly 3 percent last year and is expected to grow another 3.7 percent this year. Retailers don’t see the same window of cheap-leasing opportunity as they do in the Bay Area. “New York is still seen as expensive, and while retailers want to be there, there is less sense of urgency,” Brown said.

No Texas markets made the top 10 list, despite the relative strength of the economy of the Lone Star state and its lower unemployment rates. Because Texas fared better during the recession, construction continued and vacancy rates have crept up, Brown said.

The Dallas-Fort Worth metroplex, with more than 152 million square feet of shopping center inventory, saw vacancy climb over 13 percent from 2009 to 2010, according to the report. Asking rents fell nearly 7 percent year over year, to $13.01 a square foot a year.

Bright spots in the retail landscape include quickly recovering urban markets, forecast increases of as much as 5 percent in consumer spending this year, surging demand from discounters of all stripes, and in a related phenomenon, strong expansion among grocers, including unexpected efforts by merchants such as Walgreens and dollar stores to include more fresh foods and groceries, according to the report.

But the same barbell pattern seen among investors—who have seemed to want only trophy or distressed properties—has its mirror image among merchants and shoppers themselves. While luxury goods sellers and shoppers are rebounding strongly, discounters such as Forever 21, T.J. Maxx, Nordstrom Rack and Ross Dress for Less are also doing well.

Similarly, among grocery sellers, behemoths such as Walmart, the world’s largest retailer and largest grocer, are faring well as are smaller specialty stores. “It is the guys in the middle, the Raley’s of the world, the regional chains, that are not huge enough to have the buying power of Walmart and that often have unionized workers, that will struggle,” Brown said.

Another force in the grocery sector will be Fresh & Easy Neighborhood Market, which emphasizes its competitive price points and the convenience of shopping smaller outlets, he said. The U.K. company, Tesco plc, which owns the chain, is the world’s second-largest retailer, Brown noted, and after a bit of a stumbling start, the chain will ultimately thrive, he predicted. “They eventually will be everywhere,” he said.

Still, Brown expects consolidation in the grocery sector, saying the aggregate expansion by retailers provides too much capacity to be supported by demand, even with anticipated increases.

Beyond that are the dynamics of large-scale retail failures, such as Blockbuster Inc. and Borders Group Inc. book stores, which should throw up millions of square feet of retail availability. Whether other retailers will expand enough to absorb that space remains to be seen, though Brown is sanguine, in part because new construction is expected to be at “record lows” this year.

At the same time, retail demand for so-called big-box space of some 70,000 square feet and up, is flagging, in favor of spaces more in the range of 20,000 square feet to 40,000 square feet. Landlords with larger spaces are likely looking at having to divide those expanses into smaller footprints to make them fit today’s merchant demands.

West Coast Commercial Real Estate News