A New Era For California Retail

by Nate Hunter

Developers and retailers are embracing new retail concepts to meet the demands of customers.

The retail market in California is definitely making a comeback with steady improvements. Across the state, markets are showing strong and tight retail real estate environments with low vacancy rates and high rents in markets like San Francisco, Los Angeles, San Jose and Southern California beach communities to name a few.

San Francisco remains the market with the highest fundamentals in the state with vacancy at an all-time low of 2.5 percent, a compression of 60 basis points from 2013 and commanding average rental rates of $34 per square foot. However, San Francisco’s limited space restricts new retail completions in the market. Los Angeles leads California with 230,000 square feet of new retail completions, while still maintaining a tight 5.3 percent vacancy rate.

Orange and San Diego counties continue to lease up at a stable pace, while the Central Valley and the Inland Empire (Riverside and San Bernardino counties) are also showing signs of a comeback. The new residential developments throughout the Inland Empire are creating a market for new retail development and helping to fill existing vacancies, notes Bernie Labowitz, senior vice president of Newport Beach, California-based Sperry Van Ness | Renaissance Commercial.

While no submarket is really cooling, the traditional markets continue to see improvements and upticks in retail occupancies, rental rates and developments. Additionally, Chris Wilson, retail partner with Los Angeles-based Champion Real Estate Company, notes that tenant activity is slowing moving east to Ventura County and north to the high desert markets, which have been largely ignored since 2008.

“Choice locations in California, Los Angeles, Orange County, San Francisco and San Diego continue to be in high demand,” says Scott Burnham, CEO of Newport Beach, California-based Burnham USA. “The retail investment market is equally hot with capitalization rates at all time lows and prices at all time highs.”

The urban and dense markets continue to strengthen and command high rents with low vacancy rates, while secondary and tertiary markets are slower to improve as retailers and developers continue to prefer the hot markets. Brad Deck, senior vice president of retail development with Aliso Viejo, California-based Shea Properties, notes that due to the decline in development, secondary centers in primary markets are seeing better leasing activity and increased rents.

In addition to the thriving markets, the triple-net leased market is incredibly hot right now with net-leased property in high demand across all brands and the state. With compressing cap rates, investors are stretching on asset quality to deploy capital, which creates an increase in demand for net-lease properties that will generate liquidity for smaller non-credit and franchise deals, notes Mark Zimmerman, general partner with Irvine, California-based KZ DevCo.

Although liquidity and capital are available for developers and retailers, the state’s high barriers of entry, cumbersome entitlement process and costly land prices have kept developments at bay for the past few years.

“The retail investment market is robust and, in many cases, fully priced,” says Richard Chichester, president and CEO of Irvine-based Faris Lee Investments. “The capital markets are aggressive and there is currently more capital looking for good investments than there is supply of product.”

To add to the complications, much of California’s prime real estate has already been taken due to the flight to quality by retailers and developers over the past few years.
Newport Beach-based Irvine Company Retail Properties has seen the flight to quality first hand with its premium assets.

“Tenants are willing to pay more rent to be in the highest quality property in the marketplace,” says Peter Moersch, vice president leasing — neighborhood and community centers with Irvine Company Retail Properties. “Retail sales across our portfolio are up anywhere from 5 to 10 percent, and we are currently 97 percent leased. Additionally, many of our assets are 100 percent occupied.”

Coupled with the lull in retail development — new product delivery has dropped to 50 million square feet per year compared to 200 million per year in the early 2000s — California’s market is only expected to tighten and strengthen.

A Market in Transition
While all these factors create the coveted tight marketplace that retailers and developers crave, there is a shift and change on the horizon for the state’s retail market. From changes in consumer shopping habits to online options, the marketplace is drastically changing in California and nationwide as the retail market transitions away from traditional power centers and large-scale, big-box developments.

“The days of the traditional power center are gone; people can buy necessities online,” says Matt Hammond, director of brokerage with Tustin, California-based Coreland Companies. “Now retailers and developers are focusing on creating an experience that consumers can’t get online.”

To combat online shopping and the upward trend of e-commerce, retailers, developers and landlords are embracing different and unique approaches to draw consumers into their stores and shopping centers. For instance, developers are partnering with local or regional restaurants and lifestyle retailers to create differentiating factors for shopping centers in some of the tighter markets.

Bringing new-to-market, hip or trendy restaurants is a sure-fire way to draw a crowd to a new development. To tap into the restaurant craze, Newport Beach, California-based Irvine Company Retail Properties has announced the opening of five new-to-market restaurants in Orange County. Sushi Roku (opening in early 2015), Baking Betty’s, BRIO Tuscan Grille, Del Frisco’s Grille and Settebello are all making their Orange County debuts with locations at Fashion Island, Irvine Spectrum Center or Crystal Cove Shopping Center.

In addition to non-traditional anchor tenants, developers and owners are focused on creating an inviting and welcoming environment for customers throughout the development.marina view webDJM Capital Partners’ Lido Marina Village will feature a 47-slip marina with docks and decks overlooking the bay in Newport Beach, Calif.

“Experience is everything right now,” notes D. John Miller, founder and CEO of San Jose, California-based DJM Capital Partners. “Heightened attempts at customer engagement remain top of mind for retailers as well as developers.”

Giving customers reasons to stay longer and return frequently are the keys to success and the cost of entry now, continues Miller. Developers have to provide customers with unconventional entertainment and relevant events, offer inspiring and beautiful environments, surprise customers with new, not-overly exposed brands and disrupt conventional models of shopping with new formats.

Meeting the demands of the new shopper is a tall order, but developers and retailers are stepping up to the plate. With new concepts, like The Union Market Tustin in Tustin and The OC Mix in Costa Mesa, retailers and owners are embracing new concepts to attract consumers. These marketplace concepts give small retailers, local restaurants or boutiques the opportunity rent space within a larger marketplace area to sell their products or services without the overhead of a traditional retail space. Beyond offering a non-traditional space for retailers, this marketplace concept creates a unique shopping environment for customers who are looking for distinctive products, foods and services. But, what’s more is that the marketplace creates a fun experience that attracts consumers and brings them back.

Another way developers are creating a sense of place is through mixed-use projects instead of retail-only shopping centers. Shea Properties’ Alhambra Place, its latest development in Alhambra, California, offers a mix of 140,000 square feet of specialty retail space and 260 luxury apartments within an urban infill location. These mixed-use properties, with either for-sale residential units or apartments, also have the added benefit of helping to offset the high cost of land in California.

DJM Capital Partners’ Pacific City in Huntington Beach, California, is an example of a developer taking advantage of a property’s location to create a dynamic and enticing community-focused development. The beachfront mixed-use development, which is slated to open third quarter 2015, will include 191,000 square feet of boutique and national-tenant retail, restaurant and outdoor dining options, a public market, 516 luxury residences and a 250-room boutique hotel. Additionally, DJM plans to capitalize on the property’s location with programming and events to create a community within the project.

Lido Marina Village, another of DJM’s current developments, is utilizing its location at the entrance to Lido Isle in Newport Beach to create a unique mixed-used project with 116,000 square feet of boutique retail, restaurant and creative office space. Additionally, the village includes a 47-slip marina, which DJM plans to upgrade, with docks and decks overlooking the bay.

“Community is what people are looking for,” explains Miller. “All developers are concentrating on their public spaces — the large common areas where people will congregate as well as the intimate spaces where people can have ‘moments.’ It’s driving new environmental design and programming innovations.”

New and Improved
Even with the market shifts and the overall decrease in new deliveries, developers are still bringing new projects to the California retail market, as well as refreshing older projects. marina view webSouth Coast Collection SOCO in Cosa Mesa, Calif., offers 300,000 square feet of retail, restaurant and entertainment and event space, including a SOCO Courtyard hotel.Additionally, retailers continue to investigate the market looking for their chance to break in or expand across the state.

The grocery-anchored shopping center concept is still strong and thriving across the state, and there’s much anticipation and excitement over the recent grocery store related news. It remains to been seen how the Safeway and Albertson’s merger and Ron Burkle’s acquisition of Tesco’s Fresh & Easy will affect the market through repositioning, rebranding or combination, but it adds to the already competitive grocery market.

Zimmerman notes that there is a lot of competition in the organic food area. Austin, Texas-based Whole Foods Market is pushing to open 35 new stores this year with Aldi, Trader Joe’s, Sprouts and The Fresh Market pushing to compete as well.

“These anchor tenants attract a multitude of interest from small service retailers and they have been helping revitalized distressed shopping centers that have been sitting for the last few years,” says Zimmerman.

Irvine Company Retail Properties is bringing a Whole Foods Market to its development, Los Olivos Marketplace in Irvine Spectrum. This location, which is set to open in spring 2016, will be the company’s sixth store in Orange County and the second location on The Irvine Ranch.

Los Olivos Marketplace is part of Irvine Spectrum, a 5,000-acre business, residential and shopping village master planned by the Irvine Company. The marketplace will also feature casual dining restaurant, shops and services to meet the needs of Irvine Spectrum’s residents, employees and visitors. Construction for the 120,000-square-foot specialty shopping center is slated to begun this summer with completion scheduled for late 2015.

While the overall delivery of pure retail developments has decreased, Westfield Corp.’s current development shows how strong the retail market really is in California. The company’s $250 million The Village at Westfield Topanga is currently under construction in Los Angeles. The 550,000-square-foot center will boast a curated collection of global and local brands, including Costco and Crate & Barrel. With a three-mile daytime population of 101,000 and millions in daily car traffic, the center is slated to become a destination retail hotspot. In addition to a variety of retailers, The Village will feature tree-lined eateries, lightscaped event areas, a full-service spa, a gym and a yoga studio.

“We’re a pretty built out market, but there’s always opportunity for reinvention,” says Bill Rose, vice president and national director of Marcus & Millichap’s National Retail Group. “Given the high barrier of entry and entitlement requirements, it’s almost easier to buy an fully-entitled existing shopping center and recondition it.”

carlsbad webThe new open-air Westfield Carlsbad will feature 12-screen Regal Cinema and a new 24 Hour Fitness Super Sport.Westfield is also tapping into the existing opportunities in California with the $300 million transformation of the enclosed Westfield Plaza Camino Real into Westfield Carlsbad, an open-air shopping center. Highlights of the center’s redevelopment include a state-of-the-art 12-screen Regal Cinemas and a new 24 Hour Fitness Super Sport, both of which are slated to open this fall. The company is also investing $700 million in the reinvention of Westfield Century City into a landmark retail destination. Slated to open in 2017, the center will feature 422,000 square feet of new retail space with 220 shops and restaurants and 4,700 parking spaces. The center’s tenant roster includes Kate Spade, Zara, Tory Burch, Apple, Microsoft, Bloomingdale’s, Rolex, Louis Vuitton and Tiffany & Co.

Creative Adaptation
Change is on the forefront for California’s retail market from big-box retailers downsizing and adjusting to the upward trend of e-commerce to more niche restaurant and lifestyle-focused retail developments.

“Seeking new ways to engage the consumer and to create a more valued and experiential shopping environment in the new paradigm,” explains Burnham. “We accomplished this with our South Coast Collection in Costa Mesa, by curating culinary, design and fashion venues in a beautiful environment that attracts the retail consumer.”

Retailers and developers alike will have to embrace new concepts and approaches to keep customers attracted to the brick-and-mortar stores. By teaming up, retailers and developments can create exciting shopping environments that draw people in through engaging activities, events and new retailers and restaurants.

Developing a place where people want to be and hang out are the new keys to success in California’s tight retail market. While there will always be a need for traditional grocery- and general merchandise-anchored shopping centers, people are looking for more and expect to the dazzled with distinctive concepts, brands and experiences.

“The retail market is not dead, but it will look much different in the coming years,” says Alan Araki, director of investment and asset management at Los Angeles-based Primestor Development. “There is no universal answer other than developers, landlords and retailers will have to be creative, and flexible and move quickly to adapt to the every changing needs of the consumer and the way they shop.”

 — Amy Bigley Works

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