Market Updates

Bay Area Retail Real Estate: 2014 Year-End Perspective

Compiled at the International Council of Shopping Centers (ICSC) Idea Exchange Meeting.

Napa, CA – November 21-22, 2014

By Mary Alam, MBA

Senior Associate

NAI Northern California

The San Francisco Bay Area continues to be one of the hottest real estate markets in the US and is the number one development market in the country. The phenomenal growth of the office sector in Silicon Valley and San Francisco, led by the high tech industry, has generated increased demand for multi-family housing. As long as millennials have not reached the age of settling down and starting families, they want to stay mobile and are not interested in buying houses; as a result, demand for new rental and condo multi-family developments will continue. In San Francisco alone, there is an overall shortage of hundreds of thousands of multi-family units. This shortage will contribute to the continuation of the development activities for some time to come and create consistently strong demand for retail space.

The area in general has experienced a marked increase in retail rents. For example, rents in the Silicon Valley have gone as high as $65-$70 for small spaces and $30 for big box space. In San Francisco, retail rents can range from $38 per square foot on average all the way up to over $125 plus per square foot for a prime location. More retail space is slated to come online with the new residential developments planned in SF but restrictions to formula retail have been further tightened to include companies with 11 stores or more worldwide.

For the shopping center sector, the construction of brand new centers has been largely hindered by prohibitive entitlement costs that include impact, permit, planning and site utility fees. These can range from $6.50 per square foot to $41 per square foot for a 15,000 SF building. As a result, investors and developers are focusing their attentions on acquiring distressed centers and repositioning them by way of adaptive re-use. This is a much less costly approach that can ensure them a successful exit strategy and the necessary upside and return their investors require.

Bay Area Sub-Markets:

San Francisco:

It is one of the hottest markets in the country. With more than 6.3 million square feet of entitled office space and over 11,382 residential units, entitled or planned, SOMA, Mid-Market and Mission Bay will witness an increase in employee count in the range of 20,000 to 40,000 people and around 17,000 new residents. With a low unemployment rate of 4.4% and very low retail vacancy rate of 2.1% in downtown San Francisco, street level retail is now competing with office space. As a result of the high demand, rental rates can be seen in the range of $38 on average, with high end pockets such as Fillmore Street leasing in the $70-$120 per Square foot and Union Square rents easily exceeding $125 per square foot. From new luxury retailers such as Christian Dior leasing approx. 10,000 SF to outlet stores sitting side by side with their flagship stores, such as Nordstrom Rack, Last Call by Nieman Marcus and Sack’s Off 5th, the demand for retail is great. There is also overwhelming demand for food locations in the city famous for its various restaurants and eateries. For example, a major Singapore restaurant firm with international ties has spent $14 million for the buildout of the Crystal Jade Jiang Nan restaurant at The Embarcadero 4 in the Financial District. Food emporiums are expected to gain traction with the concept of a store within a store like the Ferry Building or Oxbow Market in Napa. Due to its affordability over the Manhattan retail market, San Francisco will continue to attract first time international luxury goods providers looking for a foothold in the US. There are predictions that the San Francisco downtown will become more crowded, with activity in some streets resembling Hong Kong or Manhattan. This is great news for real estate in general and the retail sector in particular.

East Bay:

This region is experiencing an extremely active shopping center development activity with major developers such as Simon properties, Carmel Partners, Merlone Geier, Hall equities and many others currently overseeing large scale projects. Among them are:

The Shoppes at Livermore (120,000 SF) which will increase the phase II of the Livermore outlets and yield a total of approx. 900,000 SF of retail (Armani, Prada, etc..),
Pacific Pearl, the Vintage and Persimmon Place (157,000 SF) in Pleasanton and Dublin.
City Center in Bishop Ranch in San Ramon with office, retail and hotel development.
In Walnut Creek, an additional 300,000 SF are under construction in Broadway Plaza with a new Safeway prototype and 200,000 SF at the Orchards and Center Place South (developed by Hall Equities, Essex Property Trust and Laconia Development).
The Shops at the Ridge in Oakland with 275,000 SF which include a state of the art 70,000 SF Safeway.
Alameda Landing by Catellus Development is underway in Alameda.
In Fremont, Pacific Commons, the Block and Downtown Fremont are among the major projects underway.

South Bay:

As the heart of Silicon Valley, the area has seen an overwhelming boom in real estate. There are approx. 14 million square feet of class A office developments under way in the area. This has generated more retail activity and rents in the $65-$70 per square foot on a NNN basis in certain areas. Among the retail centers being developed are:

Valco Mall
Homestead Square
Santa Clara Town Center
Brokaw Plaza
The Village at San Antonio Center, a mixed use project by Merlone Geier in Mountain View with retail under office and residential and a flagship Safeway Store.
Redwood City is also undergoing major residential developments with Caltrain accessibility.

North Bay:

Coddington Mall in Santa Rosa is experiencing major success with a newly opened Target store that has already exceeded all sale projections and the signing of the Unleashed concept by Petco, along with Whole Foods, Texas Roadhouse and a very successful Chipotle.

In Napa, the exciting Napa Center around First and Randolph is underway; it is a walkable multi-purpose urban district and leisure destination with 275,000 SF of retail, hotel and office space. Other projects in the area include Oak Knoll crossing, Napa Crossing and Riverpark Center. Retail rents range from $48-$60 in Marin, $30-$36 in Sonoma and Napa, higher in class A centers. The new Smart Train connecting Cloverdale, Santa Rosa, Rohnert Park and Petaluma to the Larkspur Ferry is expected to bring major residential and retail activity to the area.

Sacramento:

With an average home price of $340,000, the Sacramento area is extremely affordable and benefits from the major economic activity in the Bay Area. Its retail vacancy rate is still lagging at 10.4% but there are developments that indicate renewed retail activity. The Sacramento Kings entertainment complex in downtown Sacramento has broken ground and will consist of an arena, hotel and retail space. March Madness events are scheduled to take place at this venue in 2017. Rents in the Sacramento area are, as expected, lower than the Bay Area and they range from $1.00 to $2.00 NNN in B and C Centers and from $2.25 to $3.50 in Class A centers.

The San Francisco Bay Area continues to create opportunities in the real estate sector from higher leasing rates to increased property values. Major national and regional investors are undertaking investment and development projects that will continue to change the landscape of the real estate market. For real estate owners, there is an opportunity to sell assets at prices previously not possible. Owners of aging shopping centers should seriously consider selling at this time to take advantage of the high demand and investment funds available. For these investors, the repositioning of existing real estate acquisitions can create value and higher returns without the cost of new developments.

Mary Alam is a Senior Associate at NAI Northern California who specializes in leased investments with a focus on retail, office, and hotel properties, as well as redevelopment opportunities. Below are some of her most recent deals: