San Francisco Retail Market

San Francisco’s Vacancy Increases to 2.9%
Net Absorption Negative (118,930) SF in the Quarter

The San Francisco retail market did not experience much change in market conditions in the second quarter 2018. The vacancy rate went from 2.8% in the previous quarter to 2.9% in the current quarter. Net absorption was negative (118,930) square feet, and vacant sublease space increased by 5,138 square feet. Quoted rental rates decreased from first quarter 2018 levels, ending at $39.63 per square foot per year. A total of 4 retail buildings with 19,186 square feet of retail space were delivered to the market in the quarter, with 170,198 square feet still under construction at the end of the quarter.

Net Absorption

Retail net absorption was slightly negative in San Francisco second quarter 2018, with negative (118,930) square feet absorbed in the quarter. In first quarter 2018, net absorption was negative (131,501) square feet, while in fourth quarter 2017, absorption came in at positive 52,959 square feet. In
third quarter 2017, negative (37,407) square feet was absorbed in the market.

Tenants moving out of large blocks of space in 2018 include: ToysRUs moving out of 42,787 square feet at 200 Walnut St; Foods Co moving out of 33,400 square feet at Redwood Plaza; and Ross Dress For Less moving out of 30,002
square feet at 311 Gellert Blvd.

Tenants moving into large blocks of space in 2018 include: MINI of San Francisco moving into 45,000 square feet at 799 Van Ness Ave; Office Depot moving into 30,978 square feet at Gateway 101 Shopping Center – Office Depot; and Total Wine moving into 27,000 square feet at 2230 Bridgepointe Pky.

Vacancy

San Francisco’s retail vacancy rate increased in the second quarter 2018, ending the quarter at 2.9%. Over the past four quarters, the market has seen an overall increase in the vacancy rate, with the rate going from 2.6% in the third quarter 2017, to 2.6% at the end of the fourth quarter 2017, 2.8% at the end of the first quarter 2018, to 2.9% in the current quarter.

The amount of vacant sublease space in the San Francisco market has trended up over the past four quarters. At the end of the third quarter 2017, there were 42,276 square feet of vacant sublease space. Currently, there are 78,077 square feet vacant in the market.

Largest Lease Signings

The largest lease signings occurring in 2018 included: the 45,000-square-foot-lease signed by MINI of San Francisco at 799 Van Ness Ave; the 30,978-square-foot-deal signed by Office Depot at Gateway 101 Shopping Center; and the 13,830-square-foot-lease signed by LaLanne Fitness at 1245 Howard St.

Rental Rates

Average quoted asking rental rates in the San Francisco retail market are down over previous quarter levels, and up from their levels four quarters ago. Quoted rents ended the second quarter 2018 at $39.63 per square foot per year. That compares to $40.23 per square foot in the first quarter 2018, and $38.58 per square foot at the end of the third quarter 2017. This represents a 1.5% decrease in rental rates in the current quarter, and a 2.65% increase from four quarters ago.

Inventory & Construction

During the second quarter 2018, four buildings totaling 19,186 square feet were completed in the San Francisco retail market. Over the past four quarters, a total of 116,725 square feet of retail space has been built in San Francisco. In addition to the current quarter, two buildings with 97,539 square feet were completed in first quarter 2018, nothing completed in fourth quarter 2017, and nothing completed in third quarter 2017.

There were 170,198 square feet of retail space under construction at the end of the second quarter 2018.

Some of the notable 2018 deliveries include: Artists Studio at Pier 70, an 89,000-square-foot facility that delivered in first quarter 2018 and is now 100% occupied, and 644 Laurel St, a 12,204-square-foot building that delivered in second quarter 2018 and is now 100% occupied.

Total retail inventory in the San Francisco market area
amounted to 81,661,444 square feet in 10,492 buildings and
269 centers as of the end of the second quarter 2018.

Shopping Center

The Shopping Center market in San Francisco currently consists of 254 projects with 9,709,891 square feet of retail space in 460 buildings. In this report the Shopping Center market is comprised of all Community Center, Neighborhood Center, and Strip Centers.

After absorbing (56,479) square feet and delivering no new space in the current quarter, the Shopping Center sector saw the vacancy rate go from 2.9% at the end of the first quarter 2018 to 3.5% this quarter.

Over the past four quarters, the Shopping Center vacancy rate has gone from 2.6% at the end of the third quarter 2017, remained the same at 2.6% at the end of the fourth quarter 2017, to 2.9% at the end of the first quarter 2018, and finally to 3.5% at the end of the current quarter.

Rental rates ended the second quarter 2018 at $36.27 per square foot, up from the $35.45 they were at the end of first quarter 2018. Rental rates have trended up over the past year, going from $32.77 per square foot a year ago to their current levels.

Net absorption in the Shopping Center sector has totaled (143,069) square feet over the past four quarters. In addition to the negative (56,479) square feet absorbed this quarter, negative (33,690) square feet was absorbed in the first quarter 2018, negative (1,016) square feet was absorbed in the fourth
quarter 2017, and negative (51,884) square feet was absorbed in the third quarter 2017.

Power Centers

The Power Center average vacancy rate was 7.5% in the second quarter 2018. With negative (24,144) square feet of net absorption and no new deliveries, the vacancy rate went from 6.5% at the end of last quarter to 7.5% at the end of the second quarter.

In the first quarter 2018, Power Centers absorbed negative (22,288) square feet, delivered no new space, and the vacancy rate went from 5.5% to 6.5% over the course of the quarter. Rental started the quarter at $43.85 per square foot and ended the quarter at $55.08 per square foot.

A year ago, in second quarter 2017, the vacancy rate was 5.8%. Over the past four quarters, Power Centers have absorbed a cumulative (40,052) square feet of space and delivered cumulative 0 square feet of space. There was no
sublease space over that same period, and rental rates have gone from $56.15 to $54.00.

At the end of the second quarter 2018, there was no space under construction in the San Francisco market. The total stock of Power Center space in San Francisco currently sits at 2,374,116 square feet in 6 centers comprised of 50 buildings.

General Retail Properties

The General Retail sector of the market, which includes all freestanding retail buildings, except those contained within a center, reported a vacancy rate of 2.9% at the end of second quarter 2018. There was a total of 1,824,484 square feet vacant at that time. The General Retail sector in San Francisco currently has average rental rates of $40.54 per square foot per year. There are 165,710 square feet of space under construction in this sector, with 19,186 square feet having been completed in the second quarter. In all, there are a total of 9,941 buildings with 63,757,780 square feet of General Retail space in San Francisco.

Specialty Centers

There are currently 4 Specialty Centers in the San Francisco market, making up 1,062,090 square feet of retail space. In this report the Specialty Center market is comprised of Outlet Center, Airport Retail and Theme/Festival Centers.

Specialty Centers in the San Francisco market have experienced negative (1,107) square feet of net absorption in 2018. The vacancy rate currently stands at 2.3%, and rental rates are negotiable.

Malls

Malls recorded net absorption of 0 square feet in the second quarter 2018. This net absorption number, combined with no new space that was built in the quarter, caused the vacancy rate to remain the same at 0.2% at the end of the second quarter 2018 compared to the previous quarter. In this report the Mall market is comprised of 5 Lifestyle Center, Regional Mall and Super Regional Malls.

Sales Activity

Tallying retail building sales of 15,000 square feet or larger, San Francisco retail sales figures fell during the first quarter 2018 in terms of dollar volume compared to the fourth quarter of 2017.

In the first quarter, two retail transactions closed with a total volume of $60,175,000. The two buildings totaled 99,622 square feet and the average price per square foot equated to $604.03 per square foot. That compares to eight transactions totaling $188,143,000 in the fourth quarter 2017. The total
square footage in the fourth quarter was 434,653 square feet for an average price per square foot of $432.86.

Total retail center sales activity in 2018 was down compared to 2017. In the first three months of 2018, the market saw two retail sales transactions with a total volume of $60,175,000. The price per square foot averaged $604.03. In the same first three months of 2017, the market posted three transactions
with a total volume of $278,567,000. The price per square foot averaged $875.17.

Cap rates have been lower in 2018, averaging 4.30% compared to the same period in 2017 when they averaged 4.40%.

One of the largest transactions that has occurred within the last four quarters in the San Francisco market is the sale of Bridgepointe Shopping Center in San Mateo. This 227,644-square-foot power center sold for $125,000,000, or $549.10 per square foot. The property sold on 11/14/2017.