A robust consumer climate and big-name store opennings keep California retail in high style.
By Nellie Day
California's demographics, weather and topography continue to create an ideal environment to live, work, play and shop. Many of the state's strongest markets are only getting stronger, while retailers are finding opportunities for growth and penetration throughout the land.
What is the one thing that retailers and nearly 38 million people have in common? Both groups agree that California really is the place to be. The state's pristine weather, desirable coasts and creative hubs continue to attract a large number of residents and, therefore, retailers to many of its regions.
Not surprisingly, California's major metros, including San Francisco, Los Angeles and San Diego, are flourishing. According to David W. Mossman, executive vice president and CIO of Costa Mesa-based Donahue Schriber, the positive momentum is due to three factors inherent to California.
"Climate, density and diversity," he says. "The population of California is not only strong, but it also provides some of the best prospects for future growth. The general population is very diverse, and it lends itself to trying different concepts whereby new trends can be formed."
The state's coastal and near-coastal locations are particularly in demand. They not only feature high barriers to entry, but attract a relatively educated demographic that has disposable income.
"Retail leasing activity is very strong in A-plus markets, such as downtown San Francisco and core suburban markets in the Bay Area, including Marin County, the Peninsula, San Jose and other primary markets in the East Bay," says Julie Taylor, senior vice president of Cornish & Carey Commercial Newmark Knight Frank's San Francisco office. "Retailers are after California because of its population density, education, affluence and sophistication."
San Francisco is one region that exemplifies what retailers are looking to capture in California. The metro's popular Union Square neighborhood boasted a 2.2 percent retail vacancy rate in the first quarter of 2012, down from 3.8 percent one year earlier, according to Cushman & Wakefield.
The city is already home to many flagship stores, including Gap, Levi Strauss, H&M, Banana Republic, Diesel, Barneys New York and Apple. It's about to add one more to the list once Uniqlo unveils its first West Coast location here this fall.
"An interesting trend taking place in California is the expansion of both luxury/couture fashion houses and fast fashion," says Michael Phillips, COO of real estate investment and management company Jamestown L.P. "These trends reflect the growing dichotomy between disposable income across the social economic spectrum. Forever 21, H&M, Love Culture and Uniqlo are providing fashionistas with the opportunity to always be in style no matter their budget, as well as the means to intermix every season to be sure she is in style."
As Uniqlo waits to capture the attention of San Francisco's fashionistas, the company — which Cushman & Wakefield notes is the third largest international clothing store chain — has made it clear it isn't resting on its laurels.
Instead, it has unveiled a concept that's become quite familiar to Bay Area shoppers. It opened a high-tech pop-up shop which the company refers to as a "Pop-Up Experience."
"Uniqlo is proud to strengthen our ties to the Bay Area community and provide fans with an opportunity to preview our high-quality clothing and 'made-for-all' product philosophy," says Yasunobu Kyogoku, Uniqlo USA's COO, in a press release. "We are excited to open our Pop-Up Experience as a prelude to our Powell Street Flagship store opening this fall."
The company's pop-up shop features a preview of select merchandise, interactive displays and even group mixers to create what it considers "a modern, communal gathering space for inspiration and engagement." The shop will remain open until the permanent 29,000-square-foot location opens at 111 Powell Street.
"The Bay Area has enjoyed a strong run of pop-up shops," Phillips says. "Their success has transcended a broad range of store types, from food to fashion, chain stores and entrepreneurial owners. Pop-up shops have been embraced by California consumers and that trend will continue, though as vacancy rates decline there may be fewer opportunities for these types of stores."
Tech Takes Over
Uniqlo isn't the only retailer relying on technology nowadays. While it's no secret that technology has been embraced across all platforms and demographics, this bond is arguably the strongest between Millenials and their retailers.
"Because Millenials are aware 24/7 of what their friends are purchasing and wearing, they want desperately to find unique products that express their individuality," Taylor says. "Social media is all about expressing yourself, and because Millenials see hundreds of pictures of each other on Facebook, they are very image conscious. Often a retailer must captivate the consumer and his or her friends in order to make the sale."
Technology is influencing the state's retailers in a different way as well. California is known for its tech hubs, including the larger Bay Area and nearby Silicon Valley, which produces a wealth of retailers to target.
"The Bay Area is like the New York of high tech," says Leslie Lundin, managing partner and co-founder of LBG Realty Advisors, who works out of the Bay Area. "When finance ruled, New York was the place to be. Now tech rules — and will rule for the future — making the South Bay market one of the strongest in the country. That retail market is really tight, and what starts in the South Bay spreads throughout the region."
Retail Trends Expand
One trend that seems to be spreading is the fashion houses' footprints. Traditionally confined to only the most exclusive locations like Rodeo Drive and South Coast Plaza, these high-end labels are now modifying their stores to penetrate the well-to-do suburbs.
"Luxury retailers are entering suburban markets such as Marin County, Walnut Creek and, of course, Palo Alto — but when they do so, it is typically with a much smaller footprint than you would find in Downtown San Francisco," Taylor says. "The merchandise focus also changes depending on the location. In the suburbs, Louis Vuitton will focus on accessories, selling merchandise such as handbags and sunglasses, while the apparel selection will be very limited."
Interestingly, many of these fashion houses aren't just entering the suburban luxury lifestyle centers. The smart ones are also turning their attention toward outlet centers to capture the fashion-conscious — and budget-conscious — consumer.
"Consumers got used to high levels of quality and iconic brands during the heyday of the economic times," says Lisa Wagner, a principal with EWB Development, which has developed outlet centers throughout the state. "Now the consumer has felt the pain of the recession and they realize they don't have to pay full price for those brands anymore. They recognize they have the power and the cleverness to acquire the brand they want at a value. The brands, in turn, realize they can retain their consumers and even expand their audience to include consumers that may not have realized that they could attain that brand in the past."
The mentality behind these fashion houses' expansions is comparable to Uniqlo's pop-up strategy: give the consumers a taste of the merchandise so they can connect with the brand, but leave them wanting more.
"The secondary market [high-fashion] stores generally stock the accessories that allow customers to be a part of the brand, yet the core couture or luxury line apparel remains at the flagship stores where consumers will buy through the brand's full line," Phillips adds.
Deron M. Conway, director of leasing for Sacramento-based Inter-Cal Real Estate Corp., agrees that trends and momentums that start in major metros will often find their ways to the surrounding areas.
"It's an absolute ripple effect," he says. "What starts in the Bay Area certainly has a positive effect on Sacramento and its surrounding regions."
He points out that just as tech companies expanded out of Silicon Valley and into the larger Sacramento region, so, too, have retailers — and not just the fashion houses. Conway notes, for example, that once the healthy, natural and organic grocery trend took off in the Bay Area, it wasn't long until Sprouts showed an interest in nearby Citrus Heights. Once the grocer announced its desire to anchor the Sunrise Festival Shopping Center, Inter-Cal got to work on the property, which was originally built in the 1970s.
The center soon underwent a $4 million redevelopment that included brand-new outdoor seating areas, façades, awnings, landscaping and a new name, Citrus Town Center. The rebranded center also added full-wall murals, new monument signage and a 26-foot water feature.
Matthew M. May, president of May Realty Advisors in Sherman Oaks, believes the retail operators who will be successful in the future will embrace the entertainment and emotional components that complement the overall shopping experience.
"When you look at specialty grocers like Trader Joe's or Sprouts, you feel good about those stores when you walk out of them," he says. "It's a whole scene. You feel good about the experience. You want to socialize, you want to return. This is what we want in the retail world. We all want to capture an emotion."
It is this mentality that leads Lundin to believe that luxury lifestyle centers are here to stay in California.
"Lifestyle centers aren't going anywhere; I'm a firm believer in them," she says. "Everything has to have some kind of lifestyle component and entertainment. It either has to be sexy somehow or it has to offer you an awesome deal."
Ethnic grocers can also evoke the emotional shopping experience many residents seek. California has a higher proportion of immigrants than any other state, according to the Public Policy Institute of California. The institute notes 27 percent of the state's population is foreign born. Hispanics account for 55 percent of this population, while Asians account for 35 percent. It would make sense, then, that many shopping centers are happy to add retailers that serve these populations to their rosters.
"While we're not seeing a lot of expansion among the general supermarkets, the Hispanic and ethnic grocers are definitely expanding within the state," says Sandy Sigal, president and CEO of Woodland Hills-based NewMark Merrill. "These grocers absorb a fair amount of square footage and are fairly rent constrained, but they do anchor centers."
One such center is Heritage Plaza in Irvine. The 230,000-square-foot center recently completed a $10-million renovation and repositioning that allowed Regency Centers to secure Mitsuwa Marketplace, the nation's largest Japanese supermarket. Though Ralph's anchors Heritage Plaza, Mitsuwa will act as a junior anchor. Based on U.S. census data, this is probably a smart move in a city like Irvine, which boasts the fifth largest proportion of Asians (43 percent) of any American city with a population of 100,000 or more.
"California has embraced the multicultural market," says Greg Lyon, vice president of Los Angeles-based Nadel Architects, which recently completed Heritage Plaza's redevelopment. "Retail trends used to come from Europe, move to the East Coast and then to Los Angeles. More and more nowadays, California is recognizing itself as part of the Pacific Rim. It's greatly influenced by Mexico and takes many cues from the global Pacific Rim community. There is a lot happening in Asia and Mexico that we're able to pull into our work too."
Ontario is another city taking its cues from sought-after, foreign-based retailers. Cardenas Markets currently operates four locations within the city, with another two in the works, according to John Andrews, Ontario's economic development director. The Census noted Ontario's Hispanic population was at nearly 70 percent as of 2010. Based on Cardenas' expansion efforts, it would appear that both city officials and retailers expect this movement to continue.
"Some of the more traditional grocery-anchored shopping centers have seen some struggles just like everyone else," Andrews says. "But we try to make Ontario a place where businesses can succeed. And this is a place with a growing population that is positioned for future growth. With the addition of Ontario's New Model Colony, we believe the city is positioned to double in population — to more than 300,000 people — as the housing market recovers."
Andrews isn't the only one who sees the potential benefits from Hispanic grocers. May has also witnessed a flurry of activity in this niche market, and for good reason.
"What's nice about Hispanic grocers is they do an average of $1,000 per square foot," he says. "Hispanic customers are also much more loyal to their brands and trade areas. Many shop where they live, and they spend a greater percentage of their income on groceries. A lot of tenants want to be in these centers. Rents are going up, and there's a greater flood of retailers coming from Mexico that cater to the demographics."
Brad Deck, senior vice president of retail development for Aliso Viejo-based Shea Properties, has recognized this trend as well. His firm is in the process of completing Mercado del Barrio, a $58.3-million, mixed-use project in the Barrio Logan neighborhood near downtown San Diego. The project, which will be anchored by a 35,000-square-foot Northgate Gonzalez supermarket, is located at the southeast corner of Cesar E. Chavez Parkway and Main Street, across from Chicano Park. Mercado del Barrio will also contain an additional 48,000 square feet of retail space below a 92-unit affordable housing complex.
Though the ethnic and specialty grocer trends are performing well in their targeted neighborhoods, not everyone is benefiting from their presence. Traditional supermarkets, for one, continue to feel the pinch as the state's grocery offerings diversify.
"The grocery market continues to see changes in the number of players competing for grocery dollars," Deck explains. "The typical conventional supermarket is being squeezed on both sides by discount operators and upper-end specialty markets. It appears that trend will continue and may even increase with the entry of Walmart's grocery operations into California and the growth of the Hispanic grocery sector."
Redeveloping The Future
Producing the feel-good experience is definitely on the minds of retailers who enter California. The state is known as much for its laid-back attitude as it is for its appreciation of entertainment, art and all things creative.
"I think California is always on the forefront of retail and entertainment destinations," Lyon says. "And that's really because the entertainment industry is out here. That not only includes Hollywood, but the recreational entertainment industry as well. Creativity is attracted out here and the thought process behind it is disseminated throughout the state. That is something very specific that only happens here."
JMA Ventures, LLC, which recently purchased Downtown Plaza in Sacramento from Westfield Group for an undisclosed sum, is one company that recognizes the value older centers present for buyers that have a little money to invest.
"We are proud to be the new owners of Downtown Plaza," says Todd Chapman, JMA's CEO, in a press release. "This property is vitally important to the Sacramento community...[and] JMA is best positioned to transform the Downtown Plaza into a modern, thriving retail and entertainment center and we plan to do just that."
The 900,000-square-foot center is anchored by Sacramento's only flagship Macy's. It is currently 50 percent leased to tenants like Century Theatres, 24-Hour Fitness, Gap, Gap Kids, Forever 21 and Express.
Ontario Mills has also undergone a major facelift since it was purchased by Simon Property Group. Andrews praises the group's attention to details both large and small, which he credits for driving quality tenants to the outlet mall. Simon has improved the mall's public spaces, turned one of its neighborhoods into a fashion district and completely overhauled the food court, to name a few of its recent efforts.
"Simon has been doing an extraordinary job of positioning the Mills for future opportunities," Andrews says. "It's performing very well, and new tenants have recently entered the Mills, while former tenants have returned."
Last Call, Neiman Marcus' discount concept, just opened its 21,000-square-foot, first-in-market store at the Mills this past May, while Nordstrom Rack just unveiled its newly redone space. Forever 21 and Burlington Coat Factory also recently settled into newly expanded spaces.
In addition to revitalizing and beautifying properties up and down the state, many California-based centers are also focusing on sustainability. May notes that going green can oftentimes have a positive effect on a retailer's bottom line.
"A lot more retailers are looking at solar options nowadays," he says. "From healthclubs to grocery stores, that's a very nice transition to see from an environmental standpoint and from a branding standpoint."
Lyon agrees that even the spaces not targeting LEED certification will still integrate the eco-friendly mentality into their properties and brands whenever possible.
"[Sustainability] is now part of the brand and cache," he adds. "When the recession hit, the world kept revolving. People's awareness of these issues kept evolving and the kids who were 16 years old then are now college students. They're very aware of green initiatives. Going green now has a value attached to it beyond doing the right thing. It's now an appealing aspect of a center because that generation likes it and retailers are all about attracting that demographic."
A Healthy Approach To Retail
As Taylor points out, the "natural" concept isn't only popular among retail centers where initiatives like drought-resistant landscaping and solar lighting have taken off. The idea has also followed Californians home, literally.
"Californians are known to be earlier adapters," she says. "We are also far more 'green' and 'new age' than the rest of the country. Out of the gate, Prius sales in California were off the charts. It took several years for the rest of the country to catch on. In the same vein, Californians are also health conscious and are typically ahead of the rest of the country with regards to emerging fitness-related concepts."
Taylor notes that yoga apparel retailers like Athleta, Lucy Activewear and prAna are all California companies. This is a natural homebase for these brands, she argues, since many popular exercise trends, such as barre classes, which utilizes the rail made popular by ballerinas, catch on right away with this health-conscious bunch.
"Fitness tenants do well in California," Lundin adds. "So do spas. Californians are very health- and beauty-oriented, so there always seems to be a place for those tenants."
May cites California as one of the highest-growth areas for fitness clubs as existing concepts expand and new offerings enter the market.
"24 Hour Fitness is getting rid of its smaller clubs to do the bigger Super Sport locations to compete with LA Fitness and Equinox, which is also expanding out there," he says. "Blast Fitness is also targeting California. All this competition is creating a gym war out there on both the higher and lower ends."
New York-based Equinox currently operates 14 clubs in Southern California and three in Northern California. Boston-based Blast Fitness has five Northern California locations.
Service, Stability Still Rule The Landscape
As online retailers continue to draw some customers away from bricks-and-mortar purchases, more and more California-based investors and landlords seem to appreciate the residents' service-oriented mentalities. In addition to healthclubs and spas, landlords are generally happy to welcome movie theaters, hair salons, coffee shops and certain fast food retailers to their centers and cities.
"Hesperia residents have long wanted family style and full-service restaurants in the city and, along with entertainment, we are focusing some of our attraction efforts on these sectors," says Rod Yahnke, a management analyst with Hesperia's economic development department.
Hesperia has a stellar track record when it comes to introducing new concepts to their residents because the city works hard to determine what's a good match for its demographic, he asserts. The city's success with restaurants like Golden Corral, which reached its annual sales projections in the first 6 months of the year, has led Hesperia to become a testing ground for other new-to-California concepts.
Florida-based franchise Beef 'O'Brady's opened its first California location in Hesperia this month after its franchisee experienced success in 2008 when he opened the state's first Wood Grill Buffet here. Yahnke also notes the city will be the first in the region to boast a 12-screen theater with two IMAX-sized screens developed by Cinema West that will serve meals, beer and wine in two of their screen rooms. The 1,707-seat theater is scheduled to open in November.
Both in and outside of Hesperia, triple-net properties are also as hot as ever, as Chris Maling, senior vice president out of Colliers' Downtown Los Angeles office, reminds us.
"The 1031 exchange buyers trading out of multifamily, along with the family trust buyers, are gravitating toward single-tenant, triple-net-leased retail such as bank branches, quick serve retailers [QSRs] and drugstore deals," he says.
May believes the QSR concept, when done correctly, will be one of the emerging stars in California.
"Everybody and their mother is in the burger business," May says. "We're seeing that across almost every food spectrum in California. There are lots of artisanal and upscale QSR concepts that have a lot of money behind them."
Aside from capitalizing on California's health-conscious lifestyle, investors are also looking for an element of safety and stability following the Great Recession.
"The neighborhood center is the favored product type among investors as they are perceived to have the least risk to economic factors due to a daily needs category," says Michelle Schierberl, managing director of Jones Lang LaSalle's Capital Markets division in Irvine. "They also do not have the big box tenants that are reducing space due to e-commerce."
While much of the space that had been abandoned in the past few years has been leased up, some locations have been easier to fill than others.
"Anchor space vacancies of 10,000 square feet or larger were the first to lease up," notes Spencer Plumb, president and COO of San Diego-based Excel Trust. "Small-shop vacancy has been slower to recover but we are beginning to see an increase in activity in those spaces."
Plumb also admits some California cities have become safe havens of sorts for investors who, now more than ever, are looking for a sure thing.
"Over the past several years there has been a flight to safety amongst institutional funds," he says. "They have largely focused their attention on the top 10 coastal markets that are densely populated. Shopping centers in cities like San Francisco, Los Angeles and San Diego have seen tremendous appreciation from recession lows."
Dennis C. Vaccaro, senior managing director for Irvine-based Faris Lee's investment advisory group, is quick to note, however, that this trend isn't unique to the Sunshine State.
"Overall, whether it is in California or around the country, buyers are targeting perceived safety and stability in assets," he says. "They are looking for long-term leases with credit tenants in dense infill locations."
What is unique to California, though, is its near-perfect weather. Most experts agreed this phenomenon has a huge effect on the state's retail market.
"The average climate in the state allows for regular shopping patterns to be established and more frequent visits to the retailers," Mossman says.
Jeffrey Kreshek, vice president of West Coast leasing for Federal Realty Investment Trust, adds that California's predictable weather also lends itself to predictable buying patterns.
"In the East, at some point you stop selling shorts and start sellingwinter coats," he says. "In the West — or at least in Southern California — your cycle for shorts is year round, and your cycle for winter coats is shorter and you carry less inventory."
As we begin to close out 2012, there is still a lot of uncertainty surrounding California. Its redevelopment agencies have been dissolved, it posted a 10.7 percent unemployment rate in July and its budget is in disarray — not to mention what curveballs the upcoming presidential election may bring.
Yet, if you ask most Californians what they think the future holds, they're steadfastly optimist — as they've always been.
"Regardless of the political climate, California continues to bounce back based on weather and the lifestyle that the state brings to the people who are the entrepreneurs, the affluent, the ones who can afford to live here," says Bill Hagelis, president of Ventura-based Hagelis Group. "The retailers like to chase those people and the higher demographic areas provide a lot of disposable income. That's why we set the trends here. It's amazing that we do bounce back historically, but we always do."
— Nellie Day