CoStar Insight: Weekly Figures Showcases Coronavirus’ Effect on Retail Sector
The unprecedented drop seen in new leasing activity around the San Francisco Bay Area is hardly surprising given the limitation on the population under the current shelter-in-place order, which went into effect on March 17 and closed all non-essential businesses, sending shockwaves through the retail industry.
In the commercial property sector, the inability to have physical property tours limits the ability of landlords and brokers to showcase available retail spaces. New retail tenants are likely tentative, given the uncertain outlook for an economic recovery and a return to relatively normal social interactions and commercial consumption levels. And owners are struggling with the ramifications of lost rental revenue and the challenges in keeping occupancy rates up in buildings, potentially attempting to renew existing tenants early.
In an analysis of new retail leasing in seven Bay Area metropolitan areas, including San Francisco, San Jose, East Bay, San Rafael, Santa Rosa, Napa and Vallejo-Fairfield, leasing volume has plummeted to historically low levels. The seven weeks from mid-March to the end of April saw average weekly leasing activity of just 36,000 square feet. To give that figure further context, the average weekly leasing volume since 2007 across the Bay Area is over 120,000 square feet.
While it isn’t unexpected that newly signed leases have been almost non-existent in recent weeks, it does highlight yet another obstacle the retail property sector is going to have to overcome. Businesses will close as a result of the current economic downturn, leaving more vacant space in need of new tenants. The stark slowdown in leasing activity could leave a gap in new demand entering the market just as vacancies start to increase, exacerbating increases in near term vacancy rates. And restarting the leasing engine will be a crucial factor in gaining some positive momentum in the retail property market.
The effect on retail rents is expected to be negative as well. Rising vacancies and a strong pullback in demand should result in declining rental rates as owners look to fill empty retail spaces. It will be worth keeping a close eye on available space in the coming months. Across the Bay Area, availability is below 5% on average, with availability registering 5% in the East Bay, 4% in San Jose, and just over 4% in San Francisco.
From a slightly more optimistic perspective, the Bay Area retail market performed relatively well through the previous economic expansion period following the Great Recession. Strong economic and population growth in the Bay Area, along with limited supply pressure, helped to maintain healthy market fundamentals. And the Bay Area is forecasted to fare better from an employment and economic growth perspective than many other areas of the country in the coming years. So, while challenges are abundant for the retail sector, Bay Area properties may be able to outperform national trends through the current downturn.