San Francisco Retail Market Begins to Stabilize
While the vacancy inched up 90 basis points in the third quarter, asking rents also increased .4%.
San Francisco has been battered by the pandemic, from outward migration that triggered double-digit decreases in apartment rents to a near standstill in office leasing due to work-from-home policies. The retail sector, however, has managed to find some footing. According to the third quarter stats from Marcus & Millichap, asking rents have increased slightly and asset pricing has stabilized.
In the third quarter, asking retail rents increased .4% to $38 per square foot, according to the research, even as the market’s vacancy rate grew 90 basis points to 6.1%. This was welcome news after retail rents dropped 8% last year during the pandemic. The rent growth shows a sharp recovery for the asset class. Asset pricing remained flat at just under $600 per square foot, but cap rates did increase slightly to an average of 5%.
While the rent growth is a positive sign, net absorption was negative again in the second quarter, thanks largely to new construction deliveries. Construction activity is up .6%, and the market grew by 400,000 square feet this quarter. Thankfully, jobs growth is also on an upward trajectory with employment up 5.4%, an addition of 56,000 new jobs.
An earlier report from Marcus & Millichap forecasted a 6% retail vacancy rate this year in San Francisco, but expected rents to fall 2.4% to $36.96 and only 3.9% of employment growth. Employment in San Francisco remains “relatively healthy,” according to the research, with the professional and business services sector (including Big Tech) shedding only 5.3% of positions due to the recent economic crisis.
While there are some signs of stability, San Francisco continues to lose people to other metros. According to Placer.ai analysts major metros like New York City and San Francisco have posted decreases month over month this year. And in San Francisco in particular, more residents decamped for cities like New York, Phoenix, Seattle and Austin than came from those areas. This could have significant implications on the retail sector as well as other CRE pillars, like office and apartments.