https://www.bisnow.com/author/stacey-corso-769582
Despite the lengthy pandemic recovery time in many aspects of Bay Area business, the region’s retail market has joined others across the U.S. in achieving a level of health unseen for years. Relative to its office and industrial counterparts, demand runs high for retail assets in the suburbs and even select San Francisco neighborhoods.
It is true that the city’s highest-profile areas — namely downtown — continue to struggle with record-high vacancies driven by store closures, theft and even organized crime as a recovery slowly tries to take shape in that submarket.
Despite these challenges, in Silicon Valley, the Peninsula, Walnut Creek, Pleasant Hill and even Concord, strong supply and demand fundamentals and rent growth are present and expanding.
“Inflation is slowly declining and people are feeling better about the economy. We think we’re through the worst of the layoffs in the Bay Area. We have felt a lot more optimism in retail real estate in the past six months,” said Colliers Senior Vice President Ann Natunewicz.
After peaking at 5.8% at the beginning of 2022, Silicon Valley retail vacancy ticked down 30 basis points to 5.5% in Q1. Sunnyvale and Cupertino had the lowest vacancy rate of 3.9%, followed by the Morgan Hill-Gilroy submarket at 4.3%.
Silicon Valley asking rents grew 4.3% to about $37 per SF triple-net at the end of Q1.
Up and down the Peninsula, the retail portions of transit-oriented developments on BART and Caltrain lines are thriving, said Kurt Grundman, a partner at Lockehouse Retail Group.
At the enclosed 1.3M SF Hillsdale Mall in San Mateo, occupancy has remained in the high-90% range since 2021. Owners Bohannon Development Group and Northwood Investment Partners plan to capitalize on this, with plans to transform the 80-year-old shopping mall into a transit-oriented, mixed-use development anchored by the Hillsdale Caltrain station. The developers are seeking to build between 900 and 1,200 residential units, 500K SF of retail and dining space, and 2M SF of office space.
Class-A, institutional-quality malls in the suburbs, both indoors and outdoors, are also firing on all cylinders. These properties have occupancy rates in the mid-90% range or above, retail experts told Bisnow.
Of the 46M SF of malls and shopping centers retail REIT Macerich owns nationwide, occupancy at Walnut Creek’s 1M SF Broadway Plaza consistently ranks among the highest in its portfolio, according to Shelly Dress, general manager of the shopping center. On a historical basis, occupancy has remained in the 90% range, and the mall’s April occupancy rate was 92%, according to Dress.
Cartier, Harry Winston and other luxury retailers continue to attract tourists from around the world.
Asking rents have remained consistent, even during the most challenging years of the pandemic, Dress said.
“Rents never declined during the pandemic at Broadway Plaza, and are tracking at $120 per SF,” Dress said. “We did not offer many rent concessions at all at the center, but did offer our retailers to defer their rent payments during the pandemic.”
The mall fiercely bounced back from coronavirus, Dress said.
“We made history, like many businesses that rarely close, and we closed for a total of three months. Once the county stated that our retailers could reopen, our foot traffic has slowly grown in the positive direction month-over-month.”
Some recent retailers to sign on to Broadway Plaza include Cholita Linda, Palmetto Superfoods, Allbirds, Reformation, Chanel Beauty, Alo Yoga, Brilliant Earth and Evereve, according to Dress.
Meanwhile, downtown San Francisco, home to Emporium Centre San Francisco, formerly a Unibail-Rodamco-Westfield mall, continues to contend with high vacancy, store closures, safety concerns and crime.
In the first quarter of 2024, the overall vacancy rate in downtown’s Union Square reached a new peak of 20.6%.
Still, luxury retailers remain committed to Union Square, a major international tourist destination. Bulgari leased more than 9K SF across multiple levels at 200 Grant Ave. Bulgari joins a mix of nearby luxury retailers including Cartier, Harry Winston, Fendi and Dior, “solidifying the area’s status as a top destination for visitors,” Grosvenor Vice President of Asset Management Nathan Lundell said.
Although luxury retailers will always be a staple in prime Union Square locations, vacancies won’t stabilize downtown until the city deals with ongoing theft and organized crime, Grundman said.
Multiple sources told Bisnow that groups of criminals enter stores, steal merchandise and resell it online. This activity contributes to growing levels of theft that Bay Area retailers report are eating into their profits and driving them to close stores.
“Theft is still a major concern,” Grundman said. “San Francisco and the entire Bay Area has to get their head around the problem that we have. We will continue to have vacancy issues until the police start arresting people and the city starts prosecuting people and holding them accountable.”
Bisnow/Stacey Corso
In spite of ongoing crime and a recent spate of store closures, some landlords command upwards of $500 per SF for ground floor retail space in Union Square.
To that end, retailers like Target, Walgreens and CVS, which closed three downtown locations in 2022 and is closing another in October at Second and Mission streets, will continue to close their doors until these issues are resolved, he said.
Cushman & Wakefield said some additional notable closures in Q1 include Lacoste at 172 Geary St., The North Face at 180 Post St. and Jeffrey’s Toys at 45 Kearny St. Macy’s also recently announced the closure of its flagship and iconic Union Square location as part of a broader strategic restructuring by the company. The department store will remain open until it finds a new buyer for the building.
Despite growing vacancies downtown, all of the sources Bisnow talked to said rents have remained steady or accelerated, even during the pandemic.
According to Cushman & Wakefield, ground-floor retail stabilized at $495 per SF per year in Union Square. Additionally, there was a slight uptick of 1.7% year-over-year, bringing the current rental rate to $300 per SF on Post Street.
Retail investment sales remained subdued across San Francisco. According to Real Capital Analytics, four properties totaling 38K SF sold for $22.2M, or $570 per SF.
Grundman said that in the face of this adversity, leasing activity has been robust at some high-quality retail centers downtown, citing three new leases in SoMa, including Heytea, Nick the Greek and Luke’s Lobster.
“Other tenants are circling, including a handful of entertainment companies, with an experiential component to their buildings.”
Contact Stacey Corso at [email protected]