MARKET REPORT NORTHERN CALIFORNIA | SPRING 2020 COLLIERS INTERNATIONAL NORTHERN CALIFORNIA SPRING 2020 RETAIL MARKET REPORT Table of Contents Northern California Overview 5 San Francisco Market 6 Peninsula Market 8 South Bay Market 10 East Bay Market 12 North Bay Market 14 Sacramento Market 16 Stockton Market 18 Statistical Market Summary 20 Regional Office List 22 NORTHERN CALIFORNIA Retail Overview - Spring 2020 As the first quarter of 2020 ended, COVID-19 proved to be a vacancy in the region also increased, translating into nearly major setback for retailers as shelter-in-place mandates were 481,000 square feet of negative net absorption for the region. ordered to curb the spread of the pandemic. This impacted Following the COVID-19 pandemic and shutdowns throughout retailers as they were forced to close their businesses and the region, it is likely to translate into more retail space consumers were both unable and unwilling to go shop and hitting the market during the upcoming months. The Stockton dine. Unemployment increased across the US a result of the region accounted for over 54 percent of the negative net economic shutdown; however, per Beacon Economic data, absorption during the first quarter posting over 312,000 reported job losses are not (yet) permanent. They also note square feet of negative net absorption. Overall rents for this a low chance of recession in the next 24 months as well as region decreased since the end of last year by 2.2 percent to no change in consumer behavior seen yet. Additionally, there $22.53 per square foot. Since the third quarter of 2019 the may be a slowdown in investment during the second half of total number of square feet under construction has increased the year as well as a slight pause in hiring. from 690,814 square feet to 752,344 square feet. The largest property under construction in Northern California is 100 Year-over-year the Northern California region experienced Stockton Street in San Francisco, a freestanding lifestyle a slight decrease in total availability of 38 basis points at center located in Union Square. the end of the first quarter of 2020. Since the end of 2019, 4 COLLIERS INTERNATIONAL | RETAIL MARKET REPORT SPRING 2020 Vacancy Net Absorption Construction Asking Rents Availability by Submarket Availability by Submarket San Francisco Peninsula South Bay East Bay Stockton North Bay Sacramento Historical Availability vs. Asking Rate Historical Availability vs. Asking Rate - Northern California 8.10% $23.50 8.00% $23.00 7.90% $22.50 $22.00 7.80% $21.50 7.70% $21.00 7.60% $20.50 7.50% $20.00 7.40% $19.50 7.30% $19.00 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 Historical Availability Historical Asking Rate COLLIERS INTERNATIONAL | RETAIL MARKET REPORT SPRING 2020 5 SAN FRANCISCO Escalating Retail Challenges ECONOMY EXPERIENCES A SETBACK. According to California’s Employment Development Department (EDD), the unemployment rate for San Francisco jumped up to 12.6 percent in April, compared to 2.0 percent at this time last year. As a result of the economic impact from the pandemic, San Francisco may face a deficit of at least $1.7B over the next 2.5 years. There are some SAN FRANCISCO SAN positive signs, as the housing market, which took a hit immediately following shelter-in-place, has seen increased activity since mid-April according to residential real estate firm COMPASS. AVAILABILITY. Year-over-year San Francisco’s retail availability rate increased by 96 basis points. Union Square experienced the largest increase in availability, rising nearly 350 basis points since this time last year to 17.93 percent. Mid-Market’s 6x6 is still vacant since construction finished and is a major reason why the Mid-Market submarket has 38.58 percent availability. Most leasing activity in San Francisco has been put on hold since shelter-in-place, and some deals that were in escrow prior to shelter-in-place fell through. THE SOURCE OF COMPLICATIONS. COVID-19 hit an already challenged San Francisco retail industry. Neiman Marcus, a retail tenant with a large presence in the City filed for bankruptcy, and Q1 2020 Indicators many of San Francisco’s hotels announced mass layoffs. Property damage from looting in the final week of May and early June during the pandemic was another setback to retailers who were planning to reopen. Vacancy EVOLVING RENT DYNAMICS. As businesses in San Francisco took an economic hit from decreased revenue during this pandemic, many retailers have asked for rent relief. SB 939, authored by Scott Weiner, was intended to aid retailers who were heavily impacted by COVID-19; however, it Net Absorption failed to pass a committee out of Sacramento. OUTLOOK. Retail in the City may initially struggle to emerge out of the COVID-19 crisis as the phased opening will not allow it to run at full capacity. Restaurants and stores in San Francisco may Construction also depend on the willingness of customers to go back to pre-COVID levels. San Francisco’s retail vacancy tax, Prop D, is being pushed to 2022, which may offer some relief for retail landlords. Some retailers anticipate there may be more foot traffic as reopening progresses, which is evidenced by Asking Rate the initial surge of crowded restaurants and barbers in opened counties. As the COVID-19 pandemic has accelerated the demand for online shopping, retailers in San Francisco need to adapt to the changing shopping habits. Recent Transactions 112-116 Channel Street, San Francisco, CA 780 Valencia Street, San Francisco, CA B: Sandler Brothers B: 2B Living S: 1000 Channel Street (SF) Owner, LLC S: Ashwin Navin 8,672 SF | $954/PSF | $8.3 Million 6,200 SF | $1,097/PSF | $6.8 Million 712-714 Montgomery Street, San Francisco, CA 38 Hotaling Place, San Francisco, CA B: Foster Gwin Antiques B: Alan M. and Angela Heather Braverman S: Robert Grison S: Foster Gwin Antiques 8,750 SF | $686/PSF | $6.0 Million 11,745 SF | $483/PSF | $5.7 Million 6 COLLIERS INTERNATIONAL | RETAIL MARKET REPORT SPRING 2020 SAN FRANCISCO SAN Historical Availability vs. Asking Rate AvailabilityAvailability by Submarket by Submarket Historical Availability vs. Asking Rate - San Francisco 18.00% $46.00 16.00% $45.00 14.00% $44.00 12.00% $43.00 10.00% $42.00 8.00% $41.00 6.00% 4.00% $40.00 2.00% $39.00 0.00% $38.00 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 Union Square Historical Availability Historical Asking Rate Mid Market SOMA Historical Market Statistics - San Francisco Shopping Center Type Available Available Available Total Total Asking Total Gross Net San Francisco SF SF SF Availability Under Rates Inventory Absorption Absorption Direct Sublease Total (%) Const. ($NNN/Year) Strip Mall 8,600 4,467 0 4,467 51.94% 1,298 1,298 0 $0.00 Neghborhood & Community 0 0 0 0 0 0 0 0 $0.00 Power & Regional 0 0 0 0 0 0 0 0 $0.00 Other 5,719,374 808,928 12,072 821,000 14.35% 68,306 -68,993 263,640 $42.38 San Francisco Total 5,727,974 813,395 12,072 825,467 14.41% 69,604 -67,695 263,640 $42.38 Historical Availability San Francisco 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 Union Square 14.10% 6.70% 6.37% 5.90% 14.48% 7.12% 13.24% 17.54% 17.93% Mid Market 41.45% 41.97% 44.46% 46.32% 44.74% 42.08% 38.58% 45.76% 38.58% SOMA 3.76% 4.07% 4.64% 2.96% 3.18% 3.60% 2.75% 3.63% 2.75% San Francisco Total 13.12% 9.35% 9.65% 8.92% 13.45% 9.52% 12.36% 15.31% 14.41% Historical Asking Rate San Francisco 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 Union Square $45.40 $48.52 $48.52 $52.48 $47.01 $43.17 $51.90 $49.66 $49.32 Mid Market $32.83 $37.05 $39.81 $40.28 $39.96 $39.96 $34.89 $28.64 $26.37 SOMA $39.56 $40.14 $42.03 $42.69 $44.74 $45.18 $45.91 $45.36 $43.71 San Francisco Total $40.72 $41.91 $43.26 $44.93 $44.33 $41.95 $45.17 $42.59 $42.38 COLLIERS INTERNATIONAL | RETAIL MARKET REPORT SPRING 2020 7 PENINSULA SF Peninsula Retailers Brace for New Normal ECONOMY. The San Francisco Peninsula unemployment rate soared to 11.4 percent in April 2020, a stark difference compared to 12 months ago, when the local unemployment rate was 1.8 percent. While the COVID-19 pandemic impacted every segment of the economy, it has devastated the leisure and hospitality industry. In one month, this industry shed 69,600 jobs, a contraction of 50 percent, in the San Francisco and San Mateo Counties. INVENTORY. At the end of Q1 2020, the retail market remained tight as the availability rate was 3.3 percent, 10 basis points higher compared to Q1 2019. While this level of availability is consistent with 2018 and 2019 levels, availability is expected to rise, an unfortunate outcome of the COVID-19 pandemic. RENTS. Average asking rates on the Peninsula averaged $40.20/NNN per year, which is a 4.7 percent increase from Q2 2019. These high rents are in line with the rest of the commercial real estate market, which is one of the most competitive markets in the San Francisco Bay Area.