Retail apocalypse spares robust Bay Area property market

Wed, Feb 05 2020

George Avalos – Bay Area News Group

The Bay Area’s robust retail property market has dodged the worst effects of a brutal retail apocalypse that has jolted merchants around the country, a new real estate report shows.

A muscular Bay Area economy, pumped up by steady hiring and rising wages in a red-hot Silicon Valley tech sector, has helped fortify shops and restaurants against the effects of a downturn that has battered some brick-and-mortar stores nationwide, according to a report from Colliers International, a commercial real estate firm.

Retail rental rates are rising throughout the Bay Area, Colliers reported. While rents have risen, occupancy levels for stores, restaurants, and other merchants remain healthy and at high levels, Colliers reported.

“Tenant mix is still critical to a successful retail environment but in different categories,” said John Machado, executive vice president and retail expert with the San Jose office of Colliers International. “More and more we are seeing restaurants, dining, beauty, wellness, and entertainment entering the retail space” in Santa Clara County.

The shift to a fresh crop of retailers is occurring in both the South Bay and East Bay, and the new merchants have begun to dilute the long-time dominance of apparel merchants.

“You are seeing more food, more fitness, different kinds of retail uses emerging in the East Bay,” said Nadine Whisnant, a senior vice president and retail broker with the Colliers office in Oakland. “Retailers are getting more creative with getting people to go to a store.”

Still, not everything is rosy in Bay Area retail, according to the report, which compiled statistics through the end of September 2019 in areas that included five key markets in the nine-county region: the South Bay, East Bay, Peninsula, San Francisco, and North Bay.

The struggles for brick-and-mortar merchants, Colliers reported, have contributed to a small yet noticeable increase in retail vacancy rates in three of the five markets. San Francisco, the South Bay, and the East Bay endured rising vacancy levels, while the North Bay and Peninsula posted shrinking vacancies.

Yet at the same time, rental rates for retail spaces are rising in all five Bay Area markets, Colliers reported.

The East Bay was the champ for retail rental rates, as measured by percent change over a one-year period that ended in September 2019. On an annual basis, retail rents in the East Bay averaged $33.30 a square foot as of the end of September, up a whopping 52.8 percent from the same month the year before.

South Bay retail rents averaged $33.55 a square foot, up 3.3 percent from the year before, according to Colliers. The South Bay included the Fremont market.

Peninsula retail rents averaged $43.37 as of the end of September, an increase of 22.5 percent in a year. San Francisco rents for retail spaces were at an average of $52.83 a square foot, up 9.9 percent over the 12-month period. North Bay retail space rents were $22.31 a square foot, a gain of 7.1 percent, Colliers reported.

Amid these bright signs, a forbidding reminder emerged regarding the retail apocalypse. Macy’s sketched plans to shut the doors at 125 stores nationwide and said it would move its tech operations out of San Francisco and shift them to New York City. Separately, Macy’s said it would eliminate 123 jobs at its Antioch department store, which is slated to close by March 17.

By far the largest single construction project for retail spaces in the Bay Area was in San Jose, where a massive expansion is in its closing stages at Valley Fair, a high-end shopping mall, the Colliers survey determined.

The Valley Fair expansion totals 415,000 square feet and accounts for the biggest chunk of the 1.1 million square feet of retail space that’s under construction in the South Bay.

Across the street from Valley Fair, Santana Row has become an iconic destination in San Jose after principal owner Federal Realty reimagined the shopping center as a mixed-use village consisting of stores, restaurants, office buildings, hotel facilities, homes, fitness centers, and entertainment amenities.

“Brick and mortar stores have expanded the customer experience by creating highly engaging, people-centric retail environments,” Machado said. “Santana Row’s offerings are one example of how work, live and play experiences can co-exist on one property.”

Among the center’s high-profile tenants: up-and-coming cloud services and software firm Splunk, which employs hundreds of tech workers at Santana Row.

“With the addition of the office buildings and their daytime population, Santana Row is starting to show its full potential,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy. “Valley Fair’s expansion will also benefit from Federal Realty’s office tenants.”

Similarly, Broadway Plaza in downtown Walnut Creek and City Center Bishop Ranch in San Ramon both have emerged as East Bay destination centers that beckon to the entire Bay Area.

“In Walnut Creek, you have a phenomenal outside mall at Broadway Plaza, you have a theater, shops, restaurants, a lot of reasons to go to Walnut Creek,” Whisnant said.

Downtown Oakland, while not a shopping mecca, nevertheless has become a restaurant, nightclub, and entertainment hub that draws from a wide area and thrives despite the brick-and-mortar retail woes.

“Uptown in Oakland has theaters, great bars, excellent restaurants, places you can listen to music, and it’s a very vibrant area in the evening,” Whisnant said.