Shopping center vacancy is limited in the San Francisco Metropolitan Division (aka the West Bay portion of the Bay area), but development has not yet responded. The West Bay’s small 9.6-million-square-foot community-neighborhood shopping center market, for example, continues to have the lowest vacancy rate among the top markets tracked by Reis as of the second quarter of 2012, and the power center vacancy rate is even lower. Rent gains, however, are limited despite low vacancy. With consumer demand limited in the wake of the Great Recession, retailers may be unable to pay more.
The community-neighborhood shopping center vacancy rate is 3.9% for the second quarter of 2012 according to Reis, up 10 basis points from the previous quarter and also from a year earlier. Low vacancy is the norm here, as the year-end rate has not exceeded 4.1% since 1992, and it was as low as 2.5% during the 1994 to 2000 tech/dot-com boom. The power center rate is also low in San Francisco at 3.3%, but it is up 20 basis points for the quarter and 70 from a year earlier.
Terranomics reports a vacancy rate of 5.8% for all shopping centers in the broader Bay Area, down 30 basis points from a year earlier, but up 10 from the prior quarter. However the vacancy rates in the West Bay, according to this source, are lower at 4.0% for San Francisco County, 4.5% for the North Bay area that includes Marin County, and 3.0% for San Mateo County. The difference is that development is taking place in the rest of the Bay Area, keeping the vacancy rate above rock-bottom levels. For community-neighborhood center space, Reis predicts the vacancy rate will end 2012 at 3.8%, similar to the level of the past two years, but expects the rate to fall thereafter. By 2014 it is expected to match the all time year-end low of 2.5%, returning to that level in 2016 as well. Retail space is forecast to be in perpetual shortage.
SUPPLY AND DEMAND
With vacancy this low, net absorption is limited by the amount of space available to be absorbed and tends to be slightly negative when no new space is coming on line. No new community-neighborhood shopping center space completed in 2010 or 2011, none is under construction, and none is expected to open in 2012. Net absorption, accordingly, was minus 18,000 square feet in 2010, minus 17,000 in 2011, and minus 12,000 in the first half of 2012, including minus 9,000 in the second quarter. A total of negative 5,000 square feet is expected to round out the year.
Site acquisition and planning approval has traditionally been the greatest barrier to retail development in the West Bay. The City of San Francisco and other localities in San Mateo and Marin counties have sought to protect their pre-automobile street retail from shopping center competition. The redevelopment of older industrial areas, a growing population, and the loss of older supermarket chains, however, have motivated the City of San Francisco to try to attract new supermarkets. This has led to the approval of several neighborhood and community centers, there and in San Mateo County towns. Reis predicts a retail development boomlet will begin in 2013, with an average of more than 200,000 square feet per year added from that year to 2016. This, however, would merely lift the lid on demand, inducing an equal or even greater amount of net absorption as the vacancy rate falls.
There has been no new supply in other categories since the renovation of the Westfield San Francisco urban mall was completed in 2006. The 566,000-square-foot proposed regional mall at the Baylands site in Brisbane remains just a proposal, as does a 635,000-square-foot power center proposed for the Hunters Point Candlestick site in San Francisco. Most of the big-box development in the Bay Area has occurred elsewhere, particularly on the East Bay side in the Oakland area. Power and regional centers account for 20.0% of the Bay Area inventory, according to Terranomics, with community-neighborhood centers in the majority.
Since 2000, modest rent gains have alternated with small rent declines in the West Bay community-neighborhood center market. The average effective rent had risen 3.1% in the five years from 1995 to 2000, and as for the stock market increase during the same period, this spike may have limited the ability of the market to produce additional large gains. In the second quarter both the average asking rent and the average effective rent rose 0.4% to $32.80 psf and $29.91 psf. The year-over-year gains are 0.6% asking and 0.7% effective. The small gap between the asking and effective averages shows that concessions are limited here.
The average asking rent for San Francisco’s rare power centers is very high at $40.32 psf, up 1.1% from the prior quarter and 2.2% from a year earlier. For all retail space in the Bay area, Terranomics reports an average asking rent of $23.40 psf, up 4.0% from one year earlier. This source reports higher asking averages in most of the West Bay, at $33.60 psf in San Francisco County and $26.38 psf in San Mateo County. The North Bay asking average is given as $20.10 psf. “Rents,” this source predicted, “will continue their pattern of growth driven by demand for Class A and B space.”
Reis predicts community-neighborhood center rent gains will continue to be limited, at around 1.0% in 2012, around 1.5% in 2013, and around 2.0% in each of the subsequent three years. Beginning in 2014 this markets rent gains are expected to underperform the U.S and West region averages, as had been the case for most of the 2000s. Given that the rent decreases each year from 2009 to 2011 were modest also, however, both the asking average and the effective average are forecast to reach a new high by the end of 2015, and to continue rising thereafter. The long term trend, therefore, is slightly up from a high base.