California Apparel News

Real estate insiders keep eyes on vacancy rates in the coming year.

National retail vacancy rates are at some of the highest levels in years, but California has not suffered as much as other regions of the country. While the vacancies appear to be holding steady, some industry watchers say vacancy rates in the state could continue to climb in the next few quarters.

In California, 4.5 percent of the state’s retail square footage in the second quarter of 2008 sat vacant—an increase from 3.5 percent during the second quarter of 2007, according to Robert Bach, chief economist of commercial real estate and investment company Grubb & Ellis. “Vacancy rates are at their highest since the mid-1990s,” Bach said.

While a weakening economy pulled in the reins on consumer spending recently, Bach and other economists said that California might not suffer as much.

Bach said retail development in Los Angeles County remained relatively low in the past few years—which might protect the county from further vacancies. “Even though there is less land available for new construction, existing centers will be giving up space as retailers downsize,” Bach said. “So it’s probable that vacancies will continue to increase for the next few quarters as the economy struggles to regain its footing.”

Bach also said employment numbers and the housing market in Los Angeles and Orange counties may insulate the region somewhat.

“Employment has been flat in L.A. and Orange counties so far this year, unlike the [rest of the] U.S., which has been shedding jobs at a gradual pace—so that’s a hopeful sign for the area,” he said. “But the Inland Empire has been losing jobs, and the housing problems out there will make it tougher on those retailers than areas closer in that have been built out and where the labor market is stable.” But the effects of the weakening economy will continue to be felt in California. Some say existing centers will have more space available as large retailers and chains downsize.

Despite vacancy-rate increases in California, the state has fared better than the national average, according to Bach. In the United States, retail vacancy increased to 8.2 percent in the second quarter of 2008, compared with 7.3 percent in the same quarter of the previous year.

Retail vacancies have increased in other California counties, and the areas suffering the most from increased retail vacancy rates are also the places that saw the most development in the past few years.

According to a market report by NAI Capital, headquartered in Encino, Calif., new retail developments in the Inland Empire areas of San Bernardino and Riverside counties are now seeing some of the highest vacancy rates in the state. The NAI report found retail vacancy in the region climbed to 6 percent of retail space in the second quarter of 2008, compared with 4.9 percent in the second quarter of 2007.

In Orange County, retail vacancy in the second quarter of 2008 was 3.2 percent, according to the NAI Capital report, compared with a 3.1 percent vacancy in the same time in the previous year. In Los Angeles County, vacancy was 3 percent in the second quarter of 2008, compared with 2.3 percent in the same time in the previous year.

Retail vacancy in the seven counties of the San Francisco Bay Area climbed to 4.3 percent in the second quarter of 2008, compared with 3.7 percent in the second quarter of 2007, according to Terranomics Retail Services, a real estate company owned by NAI.

Vacancy rates could continue to rise if unemployment rates increase, said Larry Kosmont, president of Kosmont Cos., an Encino, Calif.–based development company that advises public- and private-sector groups on real estate issues. According to California’s Employment Development Department, unemployment increased to 6.9 percent in June from 6.8 percent in May.

Kosmont also said another issue is big retailers such as Gap Inc. and Kohl’s cutting back expansion plans recently, which has left a smaller pool of retailers to fill a greater supply of retail spaces.Feeling the impact

Vacancies are more prevalent on many California streets considered second- or third-tier retail areas, but shuttered storefronts are also popping up on coveted retail streets such as Robertson Boulevard in Los Angeles, said Matthew May, president of May Realty Advisors, based in Sherman Oaks, Calif.

“There are five spaces available on Robertson,” May said. “I don’t know if there was one a year ago.” The weak economy has made it harder to put together deals, May said. Fewer executives want to make decisions on expensive properties.

Kosmont agreed, saying many executives do not feel the current environment is the right one in which to make a deal. “They’re waiting to see what the real-price opportunity is. They feel prices still have a long way to go down,” he said. Commercial real estate prices are still high on Robertson. A square foot of commercial space is $27.50, up 20 percent from 2007, according to May.

Retail centers forecasted to struggle the most in the current economy are strip centers, especially those built to serve new housing developments in the Inland Empire, according to economists. “They might not be getting the traffic they wanted,” said Grubb & Ellis’ Bach.

Shopping centers doing relatively well are those that cater to Hispanic, Asian and other ethnically oriented businesses, according to Grubb & Ellis. These centers provide retail space for a growing but underserved market.

Business is expected to hold steady in lifestyle centers and grocery-anchored neighborhood centers, according to Grubb & Ellis. But malls and new mixed-use residential retail developments in urban areas are expected to see a slowdown in business.

Some real estate executives are anxious about the prospect of large tracts of empty square footage in California in the wake of the recent high-profile bankruptcy-protection filing of California-based retail chain Mervyns. Because the average Mervyns is 80,000 square feet—smaller than a typical department store but bigger than the space for a typical specialty store—few retailers would have the capacity to move in and fill up the spaces immediately.

And many mall landlords only recently resolved what to do with the empty shells of Robinsons-May stores that were left vacant after the 2004 merger between Federated Department Stores Inc. and Robinsons-May. The combined retailers were renamed Macy’s Inc. in 2007, and the parent company has since shuttered several under-performing stores.

“You think you have one problem solved and, bang, another one pops up,” said Jack Kyser, chief economist of Los Angeles County Economic Development Corp.

While vacancy rates are expected to drop shortly after the economy improves, one executive felt that vacancy rates for second- and third-tier shopping streets may not improve.

Marty Shelton, vice president of NAI Capital in Los Angeles, forecasted that consumers will increasingly choose to spend their dollars at renovated shopping centers and retail at mixed-used developments. “You might see more vacancy take place in corridors with neighborhood shops,” he said. “You might not go down the street to go to a cafeacute;. You’re going to go to The Grove [the highly popular Los Angeles lifestyle center].”

However, he also said distinctive retail areas such as Leimert Park and Larchmont Village in Los Angeles would continue to draw many consumers.

Vacancy Up

Vacancy rates in California increased statewide in the second quarter of 2008, but those regions hit hardest were the ones that had seen the highest rate of development in recent years.

Los Angeles County........................3.0%Orange County...............................3.2%Inland Empire.................................6.0%San Francisco Bay Area...................4.3%

Sources: NAI Capital, Terranomics Retail Services