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Retail's Weak Spots

San Francisco Retail

Cassidy Turley retail expert Garrick Brown, days after his firm's acquisition announcement, filled us in on why the shopping market is over-retailed and under-warehoused. (Shop-a-holics, industrial is just as important to you as storefronts.)

Industrial is on fire because more retailers are shifting to a distribution model, he told us at a 35-person "brown bag" real estate lunch at Credo‏. Amazon plans to bump up its distribution center platform from 65M  SF to 90M SF. Alibaba, which just had the biggest IPO in history ($21.1B), is twice as big. If they go head to head with Amazon in the states, that'll be an insane amount of real estate. It goes back to the demand for same or next-day delivery. Garrick's tracking 70M SF of demand for distribution space in the pipeline, and there's only 40M of existing inventory. The challenge for Bay Area distribution development is there's "nowhere to build this stuff," he says, so it may be a good time to shift to Ontario or Stockton. 

Home Depot, he reveals, is considering the Bay Area as one of a few markets for a 1.6M SF distribution center. It's a cutthroat world out there as more retailers try to keep up with the multichannel model. Last year Modell's CEO went undercover into a Dick's store and grilled the manager on e-commerce policies and strategies, alleges a lawsuit filed by Dick’s Sporting Goods in February. Kohl's stock was tanking, so it shifted its capital expenditure budget from expanding store count to building an e-commerce platform. They're now growing on the industrial side.

Not everyone's doing it right. The latest large-scale store closures are hitting mid-priced (mostly apparel) retailers that cater to the middle-class consumer, which hasn't come back since the recession: Aeropostale, Abercrombie, Crocs. Some 8% of all retail sales are online, but the good news for retail brokers, developers, and landlords is that it should top out at just 25% in the next decade.

The Bay Area shopping center vacancy is a low 5.3%, which means "nothing but garbage is left." That's why there's 6M SF of space under construction or proposed. What used to be $34/SF for shopping center space two years ago has jumped to $60/SF for new projects coming out of the ground—and that's causing more tenants to flock to cheaper markets in the Midwest. If you're a Panera, and Wall Street tells you you need 160 stores a year, St. Louis and Denver start to sound really good. No one is building a shopping center today without an anchor tenant lined up; 80% of the 23M shopping center space in the national pipeline has commitments in place.