Bay Area Retail Recovery Reaches Farther, Wider

By Sharon Simonson and Jon Peterson

In another sign of the Bay Area’s retail revival, a new study shows that of nearly four million square feet of big-box shop space left vacant in the region since the financial crisis, 66 percent has been reoccupied.

Eighty-three Bay Area locations once used by now extinct or shrinking retailers have been vacated since Jan. 1, 2008, according to commercial real estate firm Transwestern. Of those, 55 spaces have been filled while 28 remain vacant.

Transwestern incorporated locations with more than 10,000 square feet once occupied by retailers such as Borders Group Inc., Circuit City Stores Inc., Expo Design Center stores, Linens N Things Inc. and Mervyns.

The backfilling has been most robust in locations where there are smaller boxes in more densely populated neighborhoods from San Francisco down the Peninsula and into the South Bay. Vacancy increases with distance from that urban core, traveling south and east. For instance, four stores previously occupied by a Borders, a Mervyns, a Nob Hill Foods and a Save Mart remain available in Milpitas where state Highway 237 meets the Nimitz Freeway.

“The main conclusion is that space in prime markets has filled, while spaces in secondary and tertiary markets have less so,” said Brian Landes, a Transwestern researcher who specializes in the nexus between demography and geography. “Most of the locations vacated in 2008 and 2009, unless it is really a subpar location, have been re-leased, too.”

Transwestern relied on its own research and data from CoStar Group Inc. and Real Capital Analytics Inc. to reach its conclusions, according to the company.

During the real estate boom in the middle of the last decade, big-box retailers sought sites where there was housing and population growth, such as east Contra Costa County. Now they have adopted a more “cautious strategy” that relies on locations with a minimum surrounding population threshold and density that have been largely spared by the housing crisis, he said. That means locations like East Contra Costa County and East Oakland have lost allure, at least for now.

“We are seeing discretionary-goods sellers be a whole lot more cautious, while grocery and drug stores are more willing to take risk [on locations farther from the core] because those are still needs and there is still [consumer] demand,” he said.

The more remote locations will ultimately be filled but may attract more atypical uses such as churches and schools until mainstream retailers decide to move back in, he said.

Overall, retail occupancy in the region has grown by more than 330,000 square feet since the beginning of the year.

The overall Bay Area retail market’s strength is drawing the attention of investors. The San Francisco metro—including San Francisco, San Jose and the East Bay and North Bay regions—is one of the top ten investment markets globally, according to Real Capital. In the last 12 months, $1.7 billion worth of retail properties in the region have sold. That compares to $7.5 billion worth in Hong Kong and $5.2 billion in the London metropolitan area in the same timeframe.

Hong Kong is the most active retail investment market in the world. The London area ranks second, and the Bay Area ranks ninth, according to Real Capital.

Dallas-based Cypress Equities and The Carlyle Group out of Washington, D.C., are two investors counting on San Francisco retail’s enduring strength and increasing breadth. The investors have ventured into the gentrifying Mid-Market Street neighborhood with their Market Street Place development. They hope to break ground later this year and to open in the first quarter of 2015.

The co-investors are leveraging emerging opportunity as office tenants are pushed out of the booming South of Market district to long-abandoned or underused office space west on Market Street. Apartment developers are taking the same approach. Office rents in the Mid-Market Street office submarket with 5.2 million square feet have risen 57 percent since the second quarter of 2010, according to research from Jones Lang LaSalle. Average asking rent in the area at mid-year was $43.70 a square foot.

Cypress and Carlyle plan to demolish four existing and empty office buildings on the one-acre site at 935-965 Market St. and to build 250,000 square feet of shopping space in a six-story center. The building’s all-glass façade is to encompass 270 feet of Market Street frontage.

“I would believe that there is going to be more interest in the project [from retailers] than we have room for,” said Chris Maguire, Cypress’ chief executive, in an interview with The Registry. “I think we will have the benefit of being able to offer 40,000 [-square-foot] to 45,000-square-foot blocks of space and 16- to 18-foot ceilings.”

Cypress and Carlyle paid $25.15 million on July 19 for the location, according to a San Francisco-based source with direct knowledge of the transaction.

Cypress is the development and operations partner for the project; Carlyle is the equity partner. Carlyle did not respond to requests for comment.

The project’s ultimate trade area depends on what tenants eventually sign up, Maguire said. “We are talking to some retailers who would be making their initial move into the San Francisco Bay Area. Their trade area would be much bigger than say a drug store that already has several stores” in the region. “We are looking at our project as a destination-oriented retail.”

Cypress Equities is a national developer of retail, residential and mixed-use properties. The company has invested in projects with a total value of $2.6 billion since it was formed in 1995, according to its Web site. It has a regional office in San Francisco at 301 Howard St.

Carlyle is a global alternative-asset manager that oversees a series of opportunistic real estate funds. Its most-recent commingled fund was Carlyle Realty Partners VI. The total capital raise was projected to be a little bit more than $2 billion, according to its Web site.

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