Q2 2012 San Jose, California Retail Market Trends

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Q2 2012 San Jose, California Retail Market Trends

Although unintended, the market has been well served in the recent term by high barriers to entry for retail real estate development. Land is expensive, developable sites are in short supply, the approvals process is difficult, and community resistance levels often are high. Meanwhile, economic expansion, including high rates of job growth in high-paying tech business sectors, has resulted in increased consumer spending and growth in demand for retail goods and, thus, for retail real estate product as well. The 229,000 square feet of new supply added to the community and neighborhood center market through the first half of 2012, all in March at the @First multi-use complex in San Jose, were accompanied by net absorption at 233,000 square feet. (A portion of the new project was sold in May. See the Transaction Analytics section for details.) Vacancy ended the quarter at 5.9%, up 10 basis points from first quarter but down 20 year-over-year—a rate very low by current norms for this property type. Indeed, Reis put the national second quarter community-neighborhood sector rate at 10.8%. Positive net absorption in July totaled 10,000 square feet with no new supply delivered, which kept the local vacancy rate steady.

Rents, interestingly, have not responded as might be expected for a market with strong demand (and likely with pent-up demand as well), never mind the robust job growth profile. At $30.66 psf and $26.69 psf, respective asking and effective average lease rates for community-neighborhood space for the second quarter were up just 0.1% and 0.2% over the first half of the year. Indeed, this market has proven keenly sensitive to increases in vacancy and tenant contraction. The typical vacancy profile has featured low single-digit rates. Even small increases in the rate brought on a negative rent growth trend, which ran for three years until rents stabilized in 2011. The vacancy rate, meanwhile, never rose higher than 6.1%. Interestingly, the vacancy rate in the local power center market has run higher than the community-neighborhood sector rate, an unusual trend by national norms. The second quarter local rate was 7.2%, down 60 basis points year-over-year and 90 points above the national power center rate for the period. At $37.05 psf, the second quarter mean asking lease rate for non-anchor power center space was up 0.3% year-over-year.

Construction remains subdued but has increased slightly. In addition to the above-cited @First delivery, 270,000 square feet completed the same month in a freestanding building at Vietnam Town Shopping center in San Jose. Current construction consists solely of four community-neighborhood sector projects with a combined total of 500,000 square feet. The largest of the foursome, the 311,000-square-foot Village at San Antonio community center in San Jose, is scheduled to complete in June 2013. Also underway is a 270,000-square-foot expansion of the San Antonio power center nearby. Reis cites a March 2013 completion date. Other activity includes South Bay Development Company’s August purchase of a 30-acre site in San Jose. While the site has been approved for office space, the firm “is considering re-entitling [it] for retail development,” according to the local business Journal.

In July, Lennar Corporation acquired a 40-acre site on Cottle Road within a master-planned development tract in San Jose toward the development of the 320,000-square-foot Village Oaks retail center. Cutting the other way, the strong demand for office space has inspired Federal Realty Investment Trust to give up “prime Santana Row retail space for the right to build out a new 230,000-square-foot office building on the mixed-use site,” the Journal reported in August. When all is said and done, Santana Row in San Jose, in the works for years, “will have about 57,000 square feet less retail space than what was initially planned.”

Reis foresees a relative balance of supply and demand for the community-neighborhood sector for 2012 all told, and for 2013 as well. Sector

vacancy in the vicinity of 6.0% is anticipated for an extended period. Rents should grow at about 0.5% on average all told in 2012; annual growth rates should increase thereafter.