Q2 2012 San Francisco, California Retail Submarket Trends

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Q2 2012 San Francisco, California Retail Submarket Trends

Most of the retail space in the City of San Francisco is mixed-use street retail rather than the community-neighborhood shopping centers for which Reis collects data. Retail development elsewhere in the West Bay is limited by strict land use regulations.

San Francisco

  • Terranomics reports there is an “estimated 50 million square feet of freestanding, mixed-use or ground floor commercial/retail space” in the City of San Francisco. “The current vacancy rate for that segment of the retail market is just 2.0%.” The 4.0% rate cited by the firm for 3.8 million square feet of shopping center space, excluding regional malls, is down 80 basis points from a year earlier.
  • “Demand for urban retail remains exceptionally strong, but because much of this leasing activity is taking place in San Francisco’s freestanding retail buildings, the region’s shopping center statistics do not reflect the full picture in terms of the amount of growth that is taking place,” this source continued.
  • “Throughout the Bay Area as a whole, grocers and discounters have been among the most active players in the marketplace, but this trend has largely missed San Francisco simply because there is such a scarcity of large blocks of available space in the market,” according to Terranomics. “Target signed two large deals in 2011—for space at the Metreon and on Geary Boulevard in Japantown, and these stores will have grocery components—however, we have seen little in the way of grocery deals in the last year.”
  • Union Square is the premier street retail district in the Bay Area. “Through the second quarter, the vacancy rate in Union Square inched up slightly to 2.5% from 2.2% in the first quarter; however this is still below the 3.0% level posted at year-end 2011,” according to Cushman & Wakefield. “Rents are picking up again and rose 5.9% from the first quarter to $450 psf, one of the highest rents in the country behind Manhattan and Beverly Hills.”
  • “Walgreen Co. is planning to expand its Powell Street location in San Francisco to create a mega-store just off the cable car line stop,” according to the San Francisco Business Times. “The company will remodel the existing lower floor and expand into the upper story, which now houses a diner. The expanded Walgreens will include a bakery, a custom cosmetics department, fresh produce, and a juice and coffee bar.”
  • “Nordstrom is bringing edgy British fashion chain Topshop to the Bay Area,” according to the Business Times. “The new 2,500-square-foot store is slated to open in September at the Westfield San Francisco Center mall as part of a larger 14-store rollout across the country.”

San Mateo County

  • In the San Mateo County submarket, according to Reis data on community-neighborhood shopping centers, the second quarter 2012 vacancy rate is 2.7% for 3.1 million square feet of anchor space and 4.5% for 3.1 million square feet of non-anchor space. The overall rate of 3.6% is up 10 basis points from a quarter earlier and down 10 year-over-year.
  • The average asking rent for anchor space is $23.49 psf, while for non-anchor space the average is $32.59 psf. In the second quarter of 2012 both the average asking rent and the average effective rent increased 0.4%, the latter to $29.76 psf. Rents are up 0.3% by both measures from a year earlier.
  • “Vacancy has reached levels so low as to threaten growth—space users who would like to expand in the region are having a difficult time finding quality options,” according to Terranomics. This source did report a slight increase in vacancy during the second quarter.
  • San Mateo County has also missed out on grocery store expansion due to low availability, this source reported, though developers are returning to the market. “One of the notable planned projects is the Gellert Marketplace in Daly City. This center, due to be delivered in 2014, is a 140,000-square-foot anchored shopping center. However, while there are a number of projects in the planning phase, there are no significant projects under construction.”
  • The available space is of low quality according to Terranomics. “First-tier shopping centers in every San Mateo County submarket are experiencing significantly lower vacancy levels than their second- and third-tier neighbors. They are also recording rental rate growth, typically in the 5% to 10% range.”
  • Some tenants have spilled over into freestanding stores and second- tier centers, but “landlords of third-tier space having to remain extremely competitive with lease rates to lure tenants. The current average asking rent of $26.38 psf (on an annual triple net basis) is only down roughly 1% from the $26.71 psf mark of one year ago.”

Marin County

  • In the Marin County submarket, Reis reports a community-neighborhood shopping center vacancy rate of 4.2% for 1.3 million square feet of anchor space, and a $22.67 psf average asking rent. The average asking rent is $33.19 psf for 2 million square feet of non-anchor space, with a vacancy rate of 4.5%.
  • The overall vacancy rate increased 10 basis points during the second quarter to 4.4%, and is up 60 from a year earlier. Both the average asking rent and the average effective rent were up 1.2% from a year earlier, the latter at $30.18 psf. The second quarter gains were 0.3% and 0.4%, respectively.
  • Most of the retail action in the North Bay, according to Terranomics, is in the counties outside the San Francisco area rather than in Marin County, just over the Golden Gate Bridge. The largest deal reported in Marin in the second quarter was a renewal by Staples, and Reis does not show any projects in the development pipeline.