By Meghan Hall
Despite last year’s startling headlines that the end of brick-and-mortar retail is in sight, the Bay Area retail market continues to thrive as economic growth boosts both earnings and discretionary income, and expanding companies continue to compete for limited commercial space. Additionally, the Bay Area retail market has seen very few completions over the last couple of years, meaning that asking rents and vacancies are remaining fairly stable, according to Marcus & Millichap’s Third Quarter Retail Report.
“In general, I think we’re one of the healthiest markets in the country, maybe the healthiest,” explained David Nelson, regional manager at Marcus and Millichap. “Overall, in the San Francisco Bay Area, we’re definitely amongst the healthiest in the country.”
Economic growth continues to fuel the retail sector, which Marcus & Millichap says will continue to grow in the near future. The rate of employment growth has carried on steadily in 2019, with 84,000 new positions. Many of these positions are office or tech-related. In addition, the regional median income surpassed $120,000. More jobs—and higher paying wages—means that retailers are seeing a solid future when it comes to consumer spending.
San Francisco, for example, posted a 3.6 percent increase in total employment year-over-year, adding 41,200 jobs and eclipsing job creation totals from both the previous two years. The East Bay saw a more moderate 1.7 percent increase in total employment year-over-year and added 20,500 workers. The professional and business services sector increased by 9,200 jobs, while an additional 11,700 were created by those in the construction, education and health markets. Santa Clara County added 29,800 positions, an increase of 2.6 percent, with information and manufacturing industries leading the hiring.
“The Bay Area, also, is home to one of the strongest job markets in the country,” Nelson added. “You’ve got a lot of spending capital in the Bay Area.”
All three counties are also experiencing limited new supply with few construction completions in 2019. Overall, less than one million square feet were delivered this year. Of the 650,000 square feet that will come to market, 60 percent is within four projects, the largest at Simon Properties’ San Francisco Premium Outlets in Livermore, Calif. Additional retail space in the Salesforce Transit Center and a Whole Foods/AMC in Sunnyvale also account for half of the space brought to market in San Francisco and Santa Clara County this year.
“The retail sector has done pretty well during this run, especially considering that there is a big switch in the way people shop,” said Nelson. “But I think we haven’t overbuilt this cycle, and that has been key. Certainly, in the Bay Area, we’re more constrained in terms of land…What we have built, the model has been much more of an urban model, where we’re building mixed-use with maybe a retail component.”
In San Francisco, less than 30,000 square feet was finalized, with no deliveries for the first half of the year. During 2018, 109,000 square feet was delivered, and three developments totaling 583,000 square feet are currently in the pipeline. In Santa Clara County, the pace of retail construction also slowed from 732,000 square feet to 200,000 square feet and supply deliveries totaled just 85,000 square feet. However, there is nearly one million square feet of retail space at various stages of the planning and construction process in Santa Clara County, of which more than 40 percent is the expansion of the Valley Fair Mall in Santa Clara. And, while delivery volume surpassed 500,000 square feet for the third period over the last year in the East Bay, deliveries are anticipated to slow, with just 356,000 square feet of retail space in the pipeline.
As a result of the region’s limited construction pipeline, vacancy rate remained low across all three submarkets. San Francisco’s remains the lowest at 2.8 percent, while Santa Clara County and the East Bay have vacancy rates of 3.4 and 4.2 percent, respectively. Rental rates also continue to climb, increasing by 8.4 percent in San Francisco to $44.40 per square foot, increasing by 10.5 percent in the East Bay to $29.65 per square foot, and increasing by 3.3 percent in Santa Clara County to $34.97 per square foot.
With these fundamentals in mind, investment activity into retail-based real estate has also been healthy. In Santa Clara County, investors have deployed up to $7 million for Class B and C properties, while in San Francisco, yields of more than 5 percent were accessible for older and mixed-use properties. Cap rates in Oakland and the East Bay also remained stable in the low five percent range, and both multi- and single-tenant properties traded, with investors often targeting restaurant and fast-food joints.
“Assuming job growth continues, or at least holds stable, it seems like retail will remain a very, very strong sector in the Bay Area,” said Nelson. “Investors see the sector as having longevity, stability; there isn’t any fundamental reason for that to go away.”