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| July 26, 2003 |
Business is Hopping at Shopping Centers
by Steve Johnson - Mercury News
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It's a depressing time for commercial real estate in the Bay Area. Except for shopping centers.
The 600-plus shopping centers in and around Silicon Valley constitute ``one of the most dynamic retail markets in the country,'' concluded a recent study by BT Commercial Real Estate.
And there's no better example than the Westlake Shopping Center in Daly City.
Nestled between the Olympic Club and two other exclusive golf courses, the half-century-old complex attracted a flood of potential buyers when it landed on the market last year. Some experts appraised it at $55 million. But two dozen offers of at least $75 million came in before Kimco Realty of New York bought it for $80 million in October.
"I have never seen anything like this,'' said Grubb & Ellis senior vice president Michael Federle, who brokered the deal and has handled about 40 shopping center transactions over the past three decades. ``It's the best market of all time.''
Industry experts cite several key reasons.
. Although consumer spending has eased during the recession, many shopping centers have continued to make money.
. Bay Area consumers also boast some of the nation's highest incomes and are densely clustered around many shopping centers, providing a lucrative customer base.
. Aside from San Jose's Santana Row, few centers have been built lately. Limited competition for retail space boosts the value of existing centers.
In Santa Clara County, the amount of shopping center space has grown less than 1 percent during the past five years, according to BT Commercial. As a result, the amount of shopping center space per person in the Bay Area trails that of other California regions.
Ventura County, for example, has about 27 square feet of shopping center space per person. Orange County has 23 square feet per person, according to the National Research Bureau of Chicago.
Santa Clara County, by contrast, has 18.6 square feet per person. San Mateo has 15.5 and Alameda is at 14.6.
Until recently, developers were much more interested in building and buying offices than shopping centers, largely because offices are less constrained in where and how they can be built.
As a general rule, shopping centers need to be in areas where at least 25,000 cars pass daily. That tends to eliminate areas around industrial parks, said Randol Mackley, a principal with the Retail Real Estate Group in Santa Clara.
Also, most shopping centers are limited to one story, he added. And the loss of a tenant often has a bigger impact on a shopping center than on an office building.
``If you have one store vacant in a shopping center, it's like Miss America lost her tooth,'' Mackley said. ``Everybody sees that.''
Keeping tenants, however, hasn't been a big problem for most Bay Area centers, whose vacancy rates generally range from 2 percent to 6 percent. By comparison, 21 percent of offices in the Bay Area -- and 28 percent in San Mateo County -- are empty.
In addition, Bay Area rents at grocery-anchored centers are among the nation's highest, according to Grubb & Ellis' data. San Francisco and New York charge the most: $80 per square foot, while San Jose and Los Angeles tie for second at $36, and Oakland is third, at $30.
All these factors have made shopping centers relatively attractive to own.
Some investors are building new ones, including six in various stages of development in Contra Costa County. And several proposed centers are on sites previously slated for office or industrial use.
"We're looking at a number of opportunities of these properties transitioning into retail,'' said Matt Kircher, managing partner of Terranomics, a San Francisco real estate brokerage firm. "Cities are more in tune with wanting to do that,'' because their budgets are in bad shape and they are eager to boost sales taxes.
But most of the recent investment activity has swirled around existing centers.
Since January 2002, more than a dozen centers have been sold in the Bay Area, mostly to firms planning to renovate them. Among these is the 562,000-square-foot Westlake complex, which sports a Safeway, Walgreens, Trader Joe's and Burlington Coat Factory.
Westlake was a good match for Kimco, which has an ownership interest in 567 shopping centers, but relatively few in California, said Kimco spokesman Scott Onufrey.
"We like the market,'' he said. "This particular shopping center is located right among thousands of homes with no competing shopping centers nearby.''
Under terms of the deal, Westlake Development of San Mateo, which bought the center in 1973, will remain part owner unless it chooses to later trade its interest for Kimco stock.
Although Westlake Development owns five other centers -- including San Mateo's Bridgepointe, which it bought last year -- Chief Executive Will Chang fears grocery-anchored centers like Westlake may be headed for trouble. He's not sure they'll be able to compete against the growing number of Wal-Mart supercenters, which also sell groceries. "The whole world of retail is changing,'' Chang said.
Nonetheless, Robert Bach, Grubb & Ellis' national director for market analysis, believes there are enough grocery customers to keep most supermarket-oriented centers healthy for a while, even if the economy stays bad.
After all, he said. ``In a downturn, people still have to eat.''
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