National retailers have taken a step back this year and have begun looking at opening up new locations in the San Jose area in 2011 and 2012. There are fewer retailers currently active in the San Jose retail market, which can have a negative effect on the absorption of large blocks of space that come into the market as retailers downsize. Former Mervyns sites continue to be the largest weight in the market due to the substantial size of each space — sites average 85,000 square feet. It is difficult to find tenants to occupy the entire store, and it is often cost prohibitive to subdivide these properties. Retail vacancy increased in the second quarter of this year. Year-over-year, Silicon Valley’s overall vacancy rate has gone to 6 percent from 3 percent at the end of the first half of 2008. Anticipate retail vacancy to climb to 7.5 percent by year’s end.
The good news is that compared with other retail markets on the West Coast, the Silicon Valley retail market has not experienced a tremendous amount of overbuilding. The amount of jobs lost so far has been less extreme when compared with San Francisco, San Mateo and Alameda. Since July 2008, San Jose has lost approximately 41,700 jobs, compared to 98,000 lost in the San Francisco-Alameda-Fremont area and 50,400 lost in the San Mateo area in the same time period.
The level of education and the disposable income of Silicon Valley residents will help to mitigate the impact of the national recession on the local retail sector. According to the U.S. Census Bureau, as of 2007, 35 percent of San Jose’s population 25 years and older hold a bachelor’s degree or higher, which was 8 percent higher than the national average. The median household income as of 2007 was $76,354, compared with $50,007 nationally.
San Jose has a history of redeveloping major sites, which will prove to be an economic stimulant in the long run. San Jose will likely continue to see this trend of conversion of older office and R&D facilities into other types of development, such as retail or mixed-use, throughout the economic recovery, providing opportunities for other retailers to enter or expand in the market.
Coleman Landing, a 97-acre mixed-use development that will include a soccer stadium, a 300-room hotel and 2.2 million square feet of office and retail space, is currently in the development process. The retail portion will be anchored by Lowe’s Home Improvement Warehouse, which is expected to open in the first quarter. The retail development will also include restaurant space — part of which In-N-Out Burger has committed to — and is equipped for a gas station. Lowe’s continues to be the most active retail tenant in the Silicon Valley and is moving forward with different developments in the north and south San Jose submarkets. Lowe’s is bucking the trend by taking advantage of redevelopment opportunities — such as Coleman Landing, which used to be a Sierra Monitor Corporation plant — to enter a difficult market.
Given current market conditions, the retail portion of another proposed mixed-use project, @ First in San Jose, which was originally expected to be delivered late this year, has been pushed back until 2012 due to financing issues. The development is owned by Brocade, an organization that offers services and solutions to data networking, which will take part of the space for its campus.
— Marilyn Hansen is a senior vice president in Grubb & Ellis Company’s San Jose office.