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Brick and Mortar Isn't Dead

San Francisco

Retail brokers and developers need not fear e-commerce. Demand for storefronts is still strong (and not just for fixing hair). The Bay Area is especially attractive for retailers around the globe, according to panelists yesterday at Bisnow's Retail Real Estate Summit at Nikko Hotel.

SRS managing principal Matt Alexander--who reps DSW, Panera, and BevMo--says 5.8% of total retail sales in America were online last year, up from 5.1% a year earlier. While the market for shoppers in PJs is growing, it depends on the type of retailer; Nordstrom does just 10.7% of sales online and Target does just 2%. (Riding a shopping cart down around your living room just isn't as satisfying.) Interestingly, more online retailers are entering the brick-and-mortar space via pop-up stores, he notes. Matt has the cool job of filling up Market Street Place, a 250k SF retail center opening in 2015, which offers tenants a whopping 35k SF of sales floor space on one floor. That's rare for downtown, where Ross leases 50k SF on four floors.

There's definite demand for certain locations, properties, and box sizes, notes Eagle Group Finance prez Brian Good. In the suburbs, however, he thinks landlords are having issues trying to lease up vacancies caused by bankruptcies (like Linens 'N Things). Retail has been "last to get to the dance" in terms of getting lenders' attention, but he thinks more money will shift once the government pulls back on helping multifamily. His LA-based firm, which opened a San Francisco office a few months ago, looks for strong retail sales and operators who understand the sector.

Allen Matkins partner Mark Mengelberg, head of the law firm's retail practice group, says the Bay Area retail landscape for both tenants and landlords has perked up in the past five years. He notes that his wife and daughter have anxiously awaited the opening of the new American Girl Bay Area location. (The multi-floor doll house debuted in Palto Alto this month; let's hope Mark doesn't mind living with more girls.) He asks Brian what shopping center owners could do to make their property more appealing in the eyes of a lender. "Apple as a tenant is a good place to start. We will lend on that," he laughs.

San Francisco Office of Economic & Workforce Development director Todd Rufo says the city is focused on connecting residents to retail jobs, noting the success of huge hiring events for the new Target and Union Square's Uniqlo. He touched on surrounding retail at the Warriors pavilion, which is shooting for a 2017 opening. The city is spending a lot of its "brain power" on transportation, he says, to make sure the system can handle all the foot traffic and activities. (No point in buying new shoes if you don't get to try them out right away.) The pavilion would sit near the city's core transportation infrastructure; outside of Madison Square Garden, he can't think of better proximity to public transit. (Yet Knicks fans still aren't happy.)

United Growth CEO Brad LaRue says the Bay Area's success is fueled by tech, tourism, and transit-oriented development. "Outside of this little 7 by 7," however, it's a much slower and longer curve of growth--even in Silicon Valley. The retail picture isn't as bright in other parts of the country, with big boxes sitting vacant on the coast in Florida. The challenge in the Bay Area, he says, is the bureaucracy driving a lengthy entitlements process. Brad's development company is getting creative with its projects, recently replacing a gas station with a Chase branch on El Camino Real in Santa Clara. (We hadn't heard and mistakenly tried to fill up our gas tank with dollar bills. It still ran, leading us to believe Toyotas understand satire.)

Read Investments' Morgan Read is focused on neighborhood shopping centers and has a couple projects in play in Berkeley, where he's testing out a new branding concept called SOFO, short for "South of Fourth." (Watch out, SoMa.) He invited the crowd to Sierra Nevada's first tasting room that's about to open in one of Read's buildings. He says grocery stores are well insulated and "necessity-based" retailers (wait--beer isn't a necessity?). While he'd like to pursue more investment opportunities in the Bay Area, he's getting priced out of the competitive market by others who can do it faster.