SAN FRANCISCO-A recent report on the San Francisco Bay Area reveals that in comparison to other commercial sectors, the retail market is holding up very well. The report, by Marcus & Millichap Real Estate Investment Brokerage Co., found that “investor interest in retail properties in the Bay Area is strong, due in part to uncertainty in other investment real estate property types. As apartment and office rents continue to adjust downward, retail property has become more attractive to investors. The retail market failed to experience ballooning rents during the past few years. Now it is also side-stepping much of the downdraft in rents as the economy deflates.”

The report states that over the next year, more than three million-sf of new retail product will enter the market. At the same time, construction will decline, as developers and lenders exercise caution in new development.

The report finds construction activity was very high last year as just less than 3.5 million square feet began in the three Metropolitan Statistics Areas (MSAs) combined. Construction commenced on two major multi-use projects in the Oakland MSA, Plaza Escuela in Walnut Creek and Bay Street in Emeryville. These two projects will add a combined 500,000 square feet of retail space to the East Bay market. The remainder of new development in the Oakland MSA is nearly all single-tenant properties. In the San Jose region, construction is now underway on the Santana Row multi-use project, which will bring another 680,000 square feet of retail space to the local market.

Over the next year, Marcus & Millichap forecasts that the average vacancy rate will increase by less than one percentage point, pushing the regional average to 6.3%. A significant portion of the product under construction is pre-leased; however, the speculative space that is coming on line is expected to take time to absorb. In addition, more store closures are likely to occur this year, which will put upward pressure on vacancy in all Bay Area markets. The increases, however, are expected to be relatively minor. The combined average is forecast to increase by just less than 1 percentage point. When compared to the apartment and office investment markets, retail will continue to be the most stable market over the next year.

One of the main reasons for the retail markets’ stability, says the report, is that retail owners did not experience astronomical rent growth during the past few years and, at present, rents are holding relatively steady. Retail property owners are expected to make greater efforts this year to attract and keep tenants; this will result in a minor downtrend in rents of approximately 1 to 2 percent.

Still, despite the increase in buyer demand, retail property values across the Bay Area will remain stable and sales velocity is expected to continue at a moderate pace, Marcus & Millichap predicts. Even with more buyers in the market, values are reliant on income and rents, which are expected to remain relatively flat.

The decline in velocity is largely due to the limited availability of product for sale. For the year to date, the Oakland MSA has experienced a significant deceleration in multi-tenant property sales velocity. Dollar volume, however, is up significantly.

Across the San Francisco MSA, sales activity was down approximately 30 percent from the same period last year, though dollar volume declined less than 10 percent. This is due primarily to an increase in investment activity in the $5 million and greater price range. A similar trend occurred in Santa Clara County; sales activity was down approximately 40 percent, while dollar volume displayed a decrease of just over 20 percent.

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