By Meghan Hall
The retail sector was already in the midst of a major shift, with owners of retail space choosing to incorporate experience-based attractions into their real estate to draw foot traffic. However, with the advent of coronavirus, property owners and landlords are being forced to shift once again as closures and shelter-in-place orders took effect. Retail property owners in the coming months will likely need to make tough decisions, as the pandemic proved to be a “major setback,” according to a Spring 2020 retail report released by brokerage firm Colliers International.
The impacts of coronavirus already exacerbated a shift to online retail that had long been in motion, said Colliers’ Regional Research Director, Doug Garcia.
“At the very macro-level, the retail industry with regards to spending per capita, as well as total U.S. spending, has been increasing steadily over the past 20 years, [but] it is just that the mechanism or the avenue by which people are obtaining retail services is changing,” explained Garcia. “There is still spending, but prior to COVID-19, people had the option of all these [different] channels; they could go into the store; they could order online; they could have it delivered. The dynamic that has changed with COVID-19 is that the in-person interaction is not occurring.”
Those in-person interactions sit at the core of retail-based real estate. Less foot traffic often can translate to less revenue, which can mean difficulty paying rents. Year-over-year, Northern California experienced a decrease in total availability of 38 basis points, and since the end of 2019, there has been 481,000 square feet of negative net absorption. Overall rents decreased by 2.2 percent to $22.53 triple net per year, region-wide.
Some markets, like San Francisco, were hit hard by current economic conditions; the City experienced a 96-point increase in its availability rate to 14.41 percent. Union Square, known as San Francisco’s main shopping district, saw its availability rate increase 350 basis points since last year. Asking rates dipped slightly to $42.triple net per year. Vacancy also increased along the Peninsula, according to Colliers; total net absorption came in at negative 49,197 square feet, and asking rates decreased to $37.65 triple net per year. Across San Mateo and San Francisco counties, the retail industry lost 69,900 jobs, a contraction of fifty percent.
Stockton, perhaps hit the hardest, saw its vacancy rate rise six percent as a result of the pandemic, and available retail space in the Central Valley increased to just under 1.4 million square feet. Asking rates, however, largely remained stable at $15.52 per square foot triple net.
Other Bay Area submarkets, however, saw retail hold fairly stable for the time being. Sacramento and the South Bay saw vacancy remain steady, while the East Bay actually experienced a decrease in its vacancy rate. In the South Bay, rents reached a record high, reaching $34.31 triple net per year, up 7.9 percent year-over-year. Submarkets like Palo Alto, Mountain View and Los Altos saw rents of $60.26 triple net per year.
North County also saw its availability rate decrease half a percentage point to just over five percent, and saw its asking rents increase to $36.20 triple net per year.
According to Garcia, entertainment-based venues are the assets hit the hardest. “In particular, things like entertainment are very much struggling,” noted Garcia. “Their services are entirely reliant on in-person interaction, and the challenge of generating revenue for rent payments has them hamstrung.”
Garcia continued, adding, “[Entertainment] was one of the ways in which retailers were trying to re-envision their business models as spending has gone online. Experiential and entertainment [amenities] were another draw to get folks to your center.”
All submarkets across Northern California are “currently challenged,” said Garcia but in different ways. In the short-term, more densely populated and CBD-based retailers are likely to struggle more as people look for more space amidst shelter-in-place recommendations.
“Retail follows rooftops,” stated Garcia. “Those central business districts will see the largest negative impacts in the short term as flight to suburbs occurs…Submarkets where the population remains stable or improves, and where shoppers are less reliant on public transportation will be best poised for recovery in the short-term. That is not to count CBD’s out. Northern California provides a plethora of reasons to reside or visit, so we expect those rooftops to backfill and tourism to resume, following our current pandemic induced recession.”
In order to create revenue, owners of retail centers will likely continually look to redevelop into a mixed-use offering or apartments, predicts Colliers. Spaces left behind by big box retailers such as Macy’s and Sears might do well as grocery stores—something that everyone needs, despite pandemic conditions. For now, retailers and tenants are looking for ways to meet lease agreements to the best of their abilities. Often, rent deferrals, as opposed to abatement, has been the main course of action.
“The current situation we find ourselves in is that neither landlords nor tenant, in my estimation, have the upper hand,” said Garcia. “…The tenant can’t generate revenue and it is difficult for the landlord to demand or obtain that rent…From what I’m seeing and hearing, both parties are coming into the table and asking, ‘How we get through this together?’”