THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN APRIL OF 2016
By David Goll[dropcap]W[/dropcap]ith rents generally up, vacancies generally down and many retailers specifically interested in moving into or expanding throughout the affluent Bay Area, retail brokers can be excused for feeling a bit chipper this spring.
When Julie Taylor attended the International Council of Shopping Centers’ Idea Exchange event in Monterey, Calif., in March, she was “blown away” at the level of interest retailers have in the Bay Area. She told of a program segment where each retailer had five minutes to make their pitches to retail brokers from throughout Northern California.
“This program went on for two hours,” said Taylor, executive vice president of the retail services group in the San Francisco office of Colliers International. “Many of these companies are opening anywhere from 50 to 200 locations this year across the country. But they have a tremendous focus on the Bay Area.”
Taylor said retailers ranged from hot specialty food purveyors to new fast-casual restaurants to established mid-market retailers like O’Reilly Auto Parts. There were newer entries like day care for dogs, and a wide array of health-and-beauty providers including laser removal and eyebrow shaping.
“You didn’t see that five years ago,” she said. “The Bay Area is not only an affluent market, but a center of innovation. Lots of retailers want to enter or expand in our market. We find a lot of them interested particularly in both the West Coast and East Coast.”
Restaurants are one of the hottest retail categories these days, Taylor said. That includes such newcomers to the market as Lemonade—a regional chain from Southern California that touts its “California comfort food” in a cafeteria setting—to established brands like Domino’s, the pizza chain seeking to expand its format from takeout-only pizzerias to sit-down restaurants.
Whether it’s fast food, fast casual or the epitome of luxury, the nine-county Bay Area is where most retailers want to be. Could it be the median Bay Area annual salary of more than $93,000 last year or the median home price exceeding $625,000 in January. Retailers know most local residents have disposable income. Taylor, who specializes in leasing at the region’s premier luxury retail address, San Francisco’s Union Square, said the vacancy rate has shrunk today to 3 percent, down from 7 percent four years ago.
As low as that is, it’s slightly above the citywide retail vacancy rate of 1.9 percent at the end of 2015, according to the most recent statistics from Robert Sammons, regional director of Northwest U.S. Research in the San Francisco office of Cushman & Wakefield. The company also reported vacancies in East Bay shopping centers at 5.3 percent in December—the lowest rate in seven years—and ranged in the North Bay counties from 4.2 percent in Sonoma to 8 percent in Solano. At retail centers in the heart of Silicon Valley, Santa Clara County, vacancies stood at 5 percent, up slightly from a year earlier.
“Things are going very well,” said James Chung, executive managing director in the San Jose office of Cushman & Wakefield. “Everyone is happy and healthy. Vacancy rates [in Santa Clara County] are in the low 5 percent range and 2.5 percent in San Mateo County. New inventory is coming into the pipeline with Sunnyvale Town Center, phase two of San Antonio Center in Mountain View and The Orchards at Walnut Creek mixed-use project, anchored by Safeway. It’s good to see quality product coming out of the ground.”
And even though many retail projects today are part of mixed-use developments also featuring residential and office, Chung said there’s still demand in the Bay Area for retail-only space.
“There’s a lot of new, interesting retail concepts, from grocery to soft goods, entertainment, boutique fitness centers,” Chung said. “They’re coming from all over the nation and the world. Demand is exceeding supply.”
That’s leading to substantial increases in asking lease rates, especially in tony commercial districts like University Avenue in Palo Alto, where they can be as high as $100 per square foot annually, Chung said. Taylor said while Union Square asking lease rates average $400 per square foot annually, they can soar as high as $1,000 in prime locations.
Formerly ailing retail districts like the downtowns of Oakland and San Jose are thriving, with rising rents to match. Solomon Ets-Hokin, senior vice president in the Oakland office of Colliers International, said the resurgent central business district of Oakland, brimming with thousands of new housing units, is designed to appeal to the most-desirable demographic—Millennials, born between 1982 and 2004.
“More and more, retail is gearing itself to millennial sensibilities,” Ets-Hokin said. “They’re good with cell phones and social media, they’re conscious about the planet, they’re the biggest users of the sharing economy.”
On the micro-level, a result of catering to Millennials is the growth of regional chains like Roam—which has two locations in San Francisco and one in Lafayette—serving 100 percent grass-fed beef, free-range turkey, all-natural bison and organic veggie burgers. On a macro-level, it has contributed to the retail revitalization of Oakland, where retailers, city planners and developers are not only concerned with fostering successful businesses, but also a sense of place.
“You have all these mixed-use projects combining retail with residential and commercial components in compact areas, relying less on sprawl,” Ets-Hokin said. “Retailers are thoughtful about fitting into places. And there is a real sense of place. That’s what millennials want.”
It’s also showing up in unexpected places, like North San Jose. As city planners attempt to transform it from a blighted industrial district into a “technology village” of companies, a 145,000-square-foot retail center is planned for Brokaw Road and I-880 anchored by a 30,000-square-foot Sprouts Farmers Market, an organic and natural foods grocer.
“It’s because of all the infill housing being built and the large daytime population of technology workers,” said Tom Nelson, vice president in the San Jose office of Colliers. “Five or 10 years ago, a center like that would have been unthinkable in that location.”