Retail Traffic

A Strong Economy BuoysBay Area Retail Growth

Redevelopment, renovation and repositioning provide golden opportunities for retailers in Northern California.

Retail has long been strong in Northern California, and thanks to a surging economy in 1997, it was even stronger than usual. According to the Association of Bay Area Governments (ABAG), the number of high-paying manufacturing jobs is growing, with jobs being added in the software, multimedia, telecommunications, finance and law sectors.

The ABAG reports that unemployment stands at only 3.5 percent in San Francisco, less than the statewide average of approximately 6 percent and the national rate of more than 5 percent. In the major population areas in Northern California, only the Central Valley has above-average unemployment, primarily because of the region's dependence on agriculture with its demand for seasonal labor.

One hundred thousand payroll jobs were added in the nine-county San Francisco Bay area in 1996, according to ABAG, and a similar number of jobs was expected to be added in 1997. In 1996, the average annual wage was $34,700 -- 9 percent above the state average and 2.4 percent over 1995. The ABAG projects that these trends will continue, with the Bay Area growing by 1.4 million people and the addition of 1.4 million jobs by 2020.

Jobs and wages increased in the Sacramento region as well. The Sacramento Area Council for Regional Governments reports that the Sacramento and Central Valley areas can expect higher rates of population growth than the Bay Area. Sacramento can expect higher rates of job growth, too.

For all the good news, economists note there are chinks in the foundation as a result of the Asian economic crisis and overly rapid expansion by some companies. Because trade with the Pacific Rim has become one of the cornerstones of the California economy, a severe Asian economic crisis could hurt this state first and worst. Many Northern California service firms -- including architects, engineers, financial consultants and others -- have important clients in Asia.

Shares in Redwood City, Calif.-based Electronics for Imaging, for example, plummeted 60 percent in one day in mid-December because of its dependence on contracts in various Southeast Asian countries. Oracle Communications, also in Redwood City, suffered a steep decline in value as well. Shares in Novato, Calif.-based Fair, Isaac Inc. fell 20 percent in a single day in December. And Santa Clara, Calif.-based 3Com Corp. saw earnings fall 91 percent in the third quarter.

Constraining new construction Despite a healthy economy, a shortage of land for new construction restrains development throughout the Bay Area. With the exception of the southern half of Santa Clara County, the tri-valley area of Alameda County and eastern Contra Costa County, just about every inch of land that can be developed has been developed. Consequently, the vast majority of retail projects involve redevelopment, renovation, expansion or repositioning of existing properties.

Further constraining Bay Area development are strong environmental and neighborhood coalitions that oppose virtually every project proposed. In many cases, the opposition is strong enough to kill a project entirely or severely limit its size.

For example, neighbors of Stones- town Galleria in San Francisco waged a campaign in the press and at City Hall that forced the owners to withdraw plans to expand and reconfigure the Macy's- and Nordstrom-anchored mall. Merchants and residents alike vowed to fight a recent proposal by Borders Books & Music to open a 35,000 sq. ft. store on Union Street, an area known for its small, upscale, independently owned boutiques and restaurants.

Residents of Mill Valley forced the owner of Tam Junction to scrap expansion plans, while one neighborhood in Berkeley succeeded in keeping both Hollywood Video and MacFrugal's from opening there. In Pleasant Hill, homeowners made the Bay Area Rapid Transit (BART) back down from a large theater project at a commuter train station.

Unlike the Bay region, the Sacramento and Central Valley areas have fewer development constraints. Land for new development is more plentiful and affordable than in the Bay area, although redevelopment is equally common. Community opposition, if not entirely absent, at least is not ubiquitous.

Retail trends With Northern California experiencing renewed residential growth, it is perhaps no surprise there has been a lot of supermarket activity in the past year. West Sacramento, Calif.-based Raley's recently acquired Gilroy, Calif.-based Nob Hill General Store Inc., which comes as good news for developers seeking as many anchor options as possible. With 115 stores, the combined company is better able to survive in the market and compete with supermarket stalwarts Safeway and Lucky Foods.

Developers also are cheered by the growing power of several small specialty chains, which are proving to be strong anchors for centers in the Bay Area's many higher-income communities. Among them are Andronico's, Draeger's,and Zanutto's, as well as two national natural-food chains, Whole Foods and Wild Oats.

Significant new retailers in the market include Dillard's, which opened its first California store in Stockton, with two more set to open in Antioch and Santa Rosa. Claim Jumper made its Northern California debut in Concord, while In-N-Out Burger opened three locations in East Bay. Saks Fifth Avenue introduced its Main Street concept, with stores scheduled for Danville and Burlingame.

San Francisco Catering to more than 16 million tourists each year, San Francisco is known for its downtown and neighborhood shopping districts. A spate of large-scale retail and entertainment projects dominated the news in the past year, however. Seven projects totaling approximately 3 million sq. ft. are either proposed or under construction.

The most talked about of the big projects is a planned $2 million, 1.4 million sq. ft., enclosed mall that would adjoin a new football stadium for the San Francisco 49ers. The mall -- a joint development of San Mateo, Calif.-based DeBartolo Entertainment Co., The Mills Corp., Arlington, Va., and Indianapolis-based Simon DeBartolo Group -- is expected to include entertainment venues, off-price retailers and factory outlets.

Voters approved two measures needed to build the project by fewer than 1,000 votes. Since the special election in June, the turmoil has not died down, and the California secretary of state is investigating charges of election fraud. Edward DeBartolo Jr.'s legal difficulties in Louisiana have not helped quell the controversy.

Although the city and the developers insist the investigations will have no effect on the project, many people remain skeptical. Observers also question whether the market can support so many large projects without damaging existing merchants and shopping districts. Project supporters, however, argue the new development will keep local residents from going outside the city for discount merchandise, and will make the market stronger by attracting additional regional shoppers and tourists.

The millions of tourists who visited San Francisco from September 1996 to September 1997 spent $5 billion, or $13.5 million per day, according to the Comprehensive Annual Financial Report prepared by the City Controller. An estimated 50 percent of tourist dollars was spent on food, entertainment and shopping.

It is no wonder that tenants are willing to pay $150 per sq. ft. to $200 per sq. ft. to be near Union Square, the city's main hotel and retail district, and up to $300 per sq. ft. to be directly on the square. Although rents drop with each block off the square, they have not fallen nearly as much as they have in the past.

Three years ago, Market Street commanded rents of $36 per sq. ft. -- with the exception of some spaces in the Nordstrom-anchored San Francisco Shopping Centre. Old Navy Clothing Co. recently signed a 70,000 sq. ft. lease on Market Street at an annual rent of $52 per sq. ft., rising to $82 per sq. ft. over the lease's 15-year duration. Northbrook, Ill.-based Grubb & Ellis predicts that Union Square rents will rise to $400 per sq. ft. and that Market Street rents will reach $100 per sq. ft. by the end of this year.

According to San Francisco-based Terranomics Retail Services, neighborhood rents run as high as $60 per sq. ft. The company reports that rents have held steady in the last year, largely because many existing tenants cannot afford to renew leases at today's prices.

A recent sales transaction demonstrates how valuable neighborhood retail sites in San Francisco have become. San Francisco-based Emerald Fund paid $13 million, more than 50 percent above the asking price of $8.6 million, to gain control of the 2.2-acre Plaza Foods property in the city's Western Addition. A plan to demolish the existing 52,000 sq. ft. shopping center and replace it with a modern supermarket topped by 160 residential units is under way.

New retailers lured to Union Square include Prada, Lacoste, Speedo, J. Crew, Donna Karan, MCM, and Johnson & Murphy. Banana Republic also recently expanded. A 49,000 sq. ft. NikeTown location and Rockport shoes recently held grand openings. DFS, a San Francisco-based retailer formerly known as Duty Free Shops, will open its first non-airport location in the old I. Magnin building. The 50,000 sq. ft. store will be a prototype for other urban stores.

Peninsula and South Bay With a healthy economy and expanding population, the San Francisco Peninsula and Silicon Valley are enjoying prosperity. The state Department of Commerce reports the median income in Santa Clara County is $70,000, and the median income in San Mateo County is only slightly less. As a result, the San Francisco Peninsula and Silicon Valley have become increasingly upscale markets.

Consequently, streetside rents have been driven to record levels, says Julie Taylor, executive sales associate for San Francisco-based Epsteen & Associates. "Downtown rents [in the two counties] have escalated to a point where streetfront rents are exceeding that of new shopping center and power center locations," she says.

Taylor says monthly rents for shop space in new Peninsula and South Bay shopping centers run approximately $2 per sq. ft. to $2.50 per sq. ft. The top malls also fetch this amount or slightly more, while rents in other well-trafficked, older centers are about 50 cents lower. Rents in the better downtowns and at Stanford Shopping Center in Palo Alto can run up to $3 per sq. ft., Taylor says.

Taylor attributes the downtown turnaround to the success of food purveyors. "Five years ago, there were vacancies all over the downtowns. A lot of the change is due to the specialty-food category revitalizing downtowns after dark. Between the books and the coffee, they've become a big draw," she says. The Palo Alto opening of Spago, the famed Los Angeles restaurant owned by celebrity chef Wolfgang Puck, is indicative of the change.

Restaurants and nightlife have become equally popular in shopping centers. "Restaurant interest has been really phenomenal," says Richard Reisman, vice president of development for San Mateo, Calif.-based Interland, which completed the 213,000 sq. ft. Mercado Santa Clara in Santa Clara last year. Tenants include World Wraps, Boston Market, the first Pete's Wicked Ale House, a 20-screen AMC theater complex and MicroCenter, an electronics retailer making its Northern California debut.

Rendol Mackley, principal for Retail Real Estate Group, San Jose, Calif., says food tenants account for more than 70 percent of inquiries for all area retail properties. One result, he notes, is a rebirth of interest in shop spaces in the 1,000 sq. ft. to 2,500 sq. ft. range.

Taylor says the same trends dictated the format of the redeveloped El Paseo de Saratoga in San Jose. Chicago-based Helios Partnership demolished an older shopping center, replacing it with a new, 350,000 sq. ft. center anchored by a 62,000 sq. ft. Lucky supermarket. Unlike the grocery-anchored centers of the past, this project combines prosaic tenants such as OfficeMax, Hallmark Showcase, Premium PetsMart, a 14-screen AMC theater complex, SuperCrown bookstore, and several cafes and higher-quality restaurants.

East Bay The entire East Bay market remains underserved -- the tri-valley area because development has not caught up with residential and commercial growth; elsewhere because of a shortage of developable sites. Virtually every project outside the Livermore-Dublin-Pleasanton area involves redevelopment, renovation or repositioning of existing properties.

In Danville, San Francisco-based Jarvis & Associates retenanted the underperforming Blackhawk Plaza, which has been renamed the Shops at Blackhawk. On a somewhat larger scale, Cincinnati-based Madison Marquette is planning to turn a former industrial site in Emeryville into 400,000 sq. ft. of retail GLA and a 270-room Hilton hotel. Also in Emeryville, Plymouth Meeting, Pa.-based IKEA acquired an abandoned steel plant for construction of a 200,000 sq. ft. store, its first in Northern California.

High rents in the market attract developers. The Macerich Co., Santa Monica, Calif., reports that sales at Broadway Plaza in Walnut Creek averaged $440 per sq. ft. last year, the second highest average in Northern California and well above the national average. Numbers like this lure upscale retailers such as Saks Fifth Avenue, AnnTaylor, Eddie Bauer, Restoration Hardware, Pottery Barn and Williams-Sonoma to the region.

Yet middle and lower market retailers also are anxious to get in, knowing that once they do, competition will be limited. San Leandro, Calif.-based Grey & Reynolds was able to draw Office Depot, MacFrugal's, Parts USA, Fashion for Less, Taco Bell, Hollywood Video and Boston Market to Fruitvale Station, a 163,195 sq. ft. center in one of Oakland's poorest neighborhoods. Roy G. Norwood Jr., senior vice president and managing director of Grubb & Ellis Mortgage Group Inc., Dallas, reports 30 lenders vied to provide permanent financing, despite the location. According to Jim Howard, managing director for New York-based TransAtlantic Capital Co., which provided the $21 million mortgage, the absence of other nearby developable sites was the project's strongest asset.

Matt Holmes, vice president for Epsteen & Associates, says the expected closure of all HomeExpress and Montgomery Ward stores should help a few new big-box retailers squeeze into the market. "The opportunity to take over a number of sites would obviously be attractive. It's difficult to come into an area with only one store because it's too expensive to service," he says.

The shortage of sites also helps keep rents up. Holmes estimates downtown Walnut Creek vacancies at approximately 4 percent, and monthly rent more than $2 per sq. ft. According to Greg Labarthe, a broker in the Walnut Creek, Calif., office of Grubb & Ellis, the city is so hot landlords will not sell at any price, preferring to take advantage of the high rents themselves. A quarterly survey by Grubb & Ellis reports Fourth Street in Berkeley and the Rockridge and Piedmont districts of Oakland command similar rents. Stoneridge Mall in Pleasanton gets up to 50 cents more per sq. ft. Elsewhere, according to the survey, rents fall in the $1 per sq. ft. to $1.75 per sq. ft. range.

Sacramento and Central Valley Sacramento and the Central Valley are seeing more retail development than they have in nearly a decade. According to area brokers, the activity reflects pent-up demand from both residents and retailers, as well as anticipated demand from a reinvigorated housing market.

Troy McKenney, retail specialist for Pearson/Grubb & Ellis, Fresno, Calif., predicts a major influx of home-buyers from the Bay Area. "When L.A. and San Francisco prices get inflated, people move into the area," he says. The price of new homes begins at about $100,000 throughout the valley compared to more than twice that in San Francisco or Silicon Valley.

The towns of Tracy and Manteca are absorbing the new residential growth at the north end of the valley, says Christopher Sill, retail specialist for Stockton, Calif.-based Lee & Associates. Their proximity to Contra Costa County makes them especially attractive for people working in the Concord to Walnut Creek corridor. The recent extension of BART to Pittsburg makes commuting to San Francisco more feasible as well.

The jump in residential growth in Tracy and Manteca have lured retailers away from the much larger Stockton in the northern valley. For example, says Sill, the first new Lucky supermarket in San Joaquin County in more than two years is under construction in Tracy, while SaveMart just finished remodeling and expanding its store in Manteca.

The region is experiencing the same retail trends that drive markets elsewhere. Restaurants, once very active in the market, are now slowing down, says Rick Martinez, retail specialist in the Sacramento office of Los Angeles-based CB Commercial Real Estate Inc. "Rental rates have firmed up, exceeding $2 per sq. ft.," he says.

Entertainment also has made inroads, according to Martinez, who reports Blockbuster Video and Hollywood Video are extremely active. Theater operators also are coming on strong. "We're being besieged by movie theater projects. We have three competing for locations," says Phil Testa, community development director for Modesto.

Overall vacancies in all markets are surprisingly low, according to statistics from valley brokerages, but brokers say that is primarily a result of the lack of new construction to this point. The low vacancies have not driven rents up, and the spate of new projects should keep rents from rising in the near future, the statistics report.

Herron says rents in the Modesto area run $1 per sq. ft. to $1.40 per sq. ft. triple net for new shop space and 70 cents per sq. ft. to 90 cents per sq. ft. triple net for big boxes. In Stockton, Sills pegs rents in the same range. McKenney reports a $1.30 per sq. ft. top in Fresno, with big boxes renting approximately 65 cents per sq. ft. to 75 cents per sq. ft.

Both Colliers International, Sacramento, and CB Commercial Real Estate Group calculate the overall retail vacancy level for the Sacramento area at about 8.5 percent -- down three points from the end of 1996 -- with approximately 2 million sq. ft. available and more coming. Bryan Wirt, retail specialist for Colliers International, says rents run about $1.50 per sq. ft. in neighborhood centers, $1.75 per sq. ft. in community centers, and up to $2.25 per sq. ft. in enclosed malls and in specialty centers in high-income neighborhoods. He says rents are flat, but he expects a slight rise soon.

An expanding population and healthy economy coupled with high rents and low vacancies ensure that retail prosperity will continue in Northern California. A shortage of land for new development throughout the region has caused a resurgence of renovation and redevelopment. With many projects under way and new retailers entering the region, it appears Northern California can look forward to a golden future.

Northern California Development Projects

* Voters in Palo Alto recently approved a Stanford University proposal providing for a $340 million redevelopment project. The redevelopment effort focuses on expanding 1.3 million sq. ft. Stanford Shopping Center as well as expanding and extending Sand Hill Road, which is near the center. The shopping center, which will grow by 80,000 sq. ft., is anchored by Bloomingdale's, Macy's, Macy's Men's Store, Neiman Marcus and Nordstrom, and features 140 specialty shops, gourmet eateries and service providers. It is owned by the university.

* Chicago-based General Growth Properties Inc. is expanding New Park Mall in Newark. A 198,000 sq. ft. Target store will join JCPenney, Macy's, Mervyn's and Sears at the 1.1 million sq. ft., two-level, regional mall in space formerly occupied by Emporium-Capwell.

The company also has expanded West Valley Mall in Tracy. An 83,000 sq. ft. Sears department store joined Gottschalks, JCPenney and Target last October, bringing the GLA of the regional mall to 665,483 sq. ft.

* Hong Kong-based CHL International is redeveloping 111 Powell Street in San Francisco. Improvements to the 25,000 sq. ft. building will include a new facade, store fronts and seismic retrofit. The project is expected to be completed in early 1999.

* Newport Beach, Calif.-based Donahue Schriber Realty Group L.P. has two projects under way. Build-out will be completed this summer on Notomas Marketplace in Sacramento. The 560,000 sq. ft. power center will feature Wal-Mart, Home Depot, Ross Dress For Less, Staples and PetsMart. A fall 1998 opening is scheduled for Raley's Marketplace in Fairfield. The neighborhood center will total 100,000 sq. ft. when complete and will be anchored by Raley's grocery store.

* San Mateo, Calif.-based Interland is building Mercado Santa Clara in Santa Clara. The 160,000 sq. ft. phase I, which opened last year, features a 20-screen, AMC theater complex, Micro Center, Kinko's, Starbuck's Coffee and Sushi Lovers. Plans for a 55,000 sq. ft. phase II are under way.

* San Francisco-based M&H Realty Partners II L.P. are renovating Westgate Mall in San Jose. Approximately 75,000 sq. ft. of small tenant space at the 645,000 sq. ft. regional mall is being reconfigured to accommodate larger tenants. The project also is being retenanted, with Barnes & Noble, Nordstrom Rack, Burlington Coat Factory, and Ross Dress For Less expected to open this summer. The shopping center is managed by M&H Property Management Inc.

* Last fall, Santa Rosa, Calif.-based Codding Enterprises remodeled and repositioned Coddingtown Mall in Santa Rosa. The renovation included new flooring, lighting and customer amenities. Also, the 930,000 sq. ft. center's GLA grew slightly to 982,000 sq. ft. with the addition of Gottschalks, which opened in a space formerly occupied by Macy's. The project also is anchored by JCPenney and Macy's.

* A grand re-opening celebration will be held this month by Newport Beach, Calif.-based KB Fund III for the newly renovated Shops at Blackhawk in Danville. Saks Fifth Avenue joins AnnTaylor, Eddie Bauer, Restoration Hardware and The Blackhawk Cinema at the 203,000 sq. ft., upscale specialty center. The project is managed by San Francisco-based Jarvis & Associates.

* Palo Alto, Calif.-based Cypress Properties Inc. is building Gateway Plaza in Santa Cruz. The 119,000 sq. ft. shopping center will feature OfficeMax, PetsMart and Ross Dress For Less when it opens this fall. The project is being leased and marketed by Los Angeles-based CB Commercial Real Estate Group Inc.

* Build-out will begin this month on Hacienda Crossing in Dublin. A project of Phoenix-based Opus West Corp., the 427,000 sq. ft. "entertainment power center" will feature Regal Cinemas and Prime Hospitality Hotel. Los Angeles-based CB Commercial Real Estate Group Inc. is leasing and marketing the center.

* San Mateo, Calif.-based NCC - Sand Hill II is building Bridgepointe in San Mateo. The 500,000 sq. ft. power center will feature Target, Toys "R" Us, Home Depot and SportMart when it opens this spring. San Francisco-based Terranomics Retail Services Inc. is leasing the center.

* New York-based Mutual of New York is renovating Central Coast Mall in San Luis Obispo. The existing 250,000 sq. ft shopping center will be demolished, and a new, 250,000 sq. ft. power center constructed. The project will include Gottschalks when it is completed in 1999. San Francisco-based Terranomics Retail Services Inc. is leasing the center.

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