A lack of new retail development in the past few years has put the Bay Area in a bind.
“We are reaching a point in the Bay Area where there is so little space that it is negatively impacting growth as retailers look to other markets where better class space is available,” said Garrick Brown, director of research at Cassidy Turley, a national commercial real estate services firm.
“The good news is that we are seeing the development pipeline picking up,” said Brown. “We are two years behind, but we should see more balanced market conditions. We are still looking at two years of aggressive rental rate growth before there is enough supply to meet demand and restore some equilibrium.”
Cupertino-based Hunter Properties’ major project, Almaden Ranch, is a 350,000-square-foot shopping center in San Jose at Highway 85 and Almaden Expressway that will include major retailer Bass Pro Shop. The site is one of the last remaining large parcels of land in Silicon Valley and is expected to open in 2015. Hunter also is developing Village Oaks, an approximately 300,000-square-foot shopping center at Cottle Road and Highway 85 in San Jose. That project includes barbell anchor tenants Target and Safeway.
In September, Cypress Equities companies plans to break ground on a multi-level retail center in San Francisco with approximately 250,000 square feet on six levels. The project is slated to open in the fall of 2016 on Market Street between 5th and 6th.
“There are very few larger developments of this size and scale coming out of the ground in the Bay Area,” said James Chung, senior managing director and principal with Terranomics, the retail arm of Cassidy Turley tasked with leasing Village Oaks. “Land is so coveted and tight, and there is so much competition not just from a retail standpoint but for office, research and development and high-density residential.”
Like Village Oaks, many of the proposed developments throughout the Bay Area include anchors such as Target, Sprouts, Walmart or Safeway. These models have emerged well from the recession as other merchants like bookstores and office suppliers have tapered off in the midst of online competition.
In general, large retailers aren’t as interested in small quiet neighborhood centers, says Randol Mackley, senior vice president for SRS Real Estate Partners’ Northern California region.
“If you look at Silicon Valley, retailers want to locate in established and proven commercial districts, they are not very good at pioneering,” he said. Those tend to include convenience vendors like coffee shops or dry cleaners.
Demand is driving renovations in dynamic locations, often with mixed-use components. One such is the The Village at San Antonio Center, the Merlone Geier Partners redevelopment project on San Antonio Road in Mountain View. The Safeway-anchored project will start construction on Phase II this fall and include about 400,000 square feet of class A office space, a 167-room business class hotel, an eight-screen theater and 80,000 square feet of restaurants and retail.
“This trend that we are seeing is driven by market demand,” said Mike Grehl, vice president with Merlone Geier. “People like to live in a more urban mixed-use environment than they have in the past. The idea that they can be in an environment where they can work, shop and live without ever getting in a car.”
Of the 60 retail markets in the United States recently surveyed by Cassidy Turley, the Bay Area topped the charts in terms of low shopping center vacancy rates with San Francisco ranking the highest on the list. While shopping center vacancy rates for the San Francisco market, which includes San Mateo County, were 2.5 percent at the end of last year, San Jose saw vacancy rates of 4.8 percent, and the East Bay of 5.7 percent.
In the past, if Class A space wasn’t available retailers would settle for higher caliber Class B space. But a fundamental shift has taken place. Now, instead of settling on lower tiered space or holding out until new product becomes available, retailers are going to other markets.
“Major merchants that want to come into Silicon Valley are willing to go to Seattle, Portland, Salt Lake City and other communities that are very embracing,” said Mackley. “They will go where they can make the numbers work and also where the political and business climate is not difficult.”
A market that is too tight doesn’t allow enough movement making new development even more critical, said Brown.
Of the space that is available, leases are filling up quickly.
“An interesting dynamic that we are seeing with shopping centers is that we have a waiting list of clients now,” said Brown. “It’s literally difficult in research to track the marketplace because a lot of it never gets advertised. Every broker has a waiting list of clients, and every shopping center has a waiting list.”
Chung said this dynamic makes every deal even more critical as property owners and retailers angle to get the best value possible.
“Competition is so fierce, it makes these deals difficult to transact,” says Chung. “People are really evaluating everything more closely with each opportunity at hand.”
Rising rental rates have also caused a shift in dynamics among retailers. Mom and pops have yet to resurge post-recession while independents are opting for safer franchise options, says Brown. Economic winners in this dynamic include best-of-class retailers who have been able to stay strong against their competitors. Landlords also win out as they command higher rents.