Surviving the Slump


Some markets fare better than others during tough times

Around this time last year I was fantasizing about a new house. Something a little smaller, but updated, with the expansive master bath and huge closets that come standard with most new construction.

But as 2007 has rolled into 2008 and the smattering of “Home For Sale” signs hasn’t budged from front yards in my Lincoln, Neb., neighborhood, we abandoned the idea of selling and focused instead on ramping up our remodeling projects. (While I may never have that cavernous master bathroom I’ve dreamed about, I’m quite happy with my new granite countertops in the kitchen.)

The housing slowdown that is impacting some of my neighbors is also affecting neighborhood retailers. Underperforming stores are closing—and leaving undesirable empty bays in their wake. And larger markets are taking bigger hits. In nearby Omaha, which is about four times the size of Lincoln, projects planned along the 204th Street corridor, anticipated to increase the retail-space inventory by a mind-boggling 20%, are now delayed, scaled back or scrapped altogether.

A recent property report on the Phoenix market predicted that the retail vacancy rate will double by the middle of next year—this in an area that added 9.3 million sq. ft. of new retail space in 2007, with another 7 million expected this year.

The outlooks for Omaha and Phoenix aren’t dissimilar from other once-vibrant markets, such as California’s Inland Empire near Los Angeles which is now riddled with foreclosures. Retail vacancies are reportedly at 12.8% now, and are forecast to hit 15.5% by the end of 2011, according to Boston-based Property & Portfolio Research, Inc. News coming from farther north in California, however, appears brighter.

San Francisco retail real estate brokerage Retail West issued some rosy predictions recently for its home base. Owners Matt Holmes and Rob Kashian say they see an economic upturn in the offing for the San Francisco retail real estate market, forecasting three distinct trends for the Bay Area. They predict:

The “Manhattanization” of San Francisco. What Holmes and Kashian mean by this, they say, is that San Francisco will, according to their predictions, continue its metamorphosis into a transit city, as well as master-plan and redevelop more walkable communities, which will in turn draw new retail outlets designed to service convenience-hungry consumers.

Innovation will trump establishment. The challenges that are sending vacancy rates elsewhere, they say, will instead foster more creative retail in San Francisco, prompting boutique retail shops to compete effectively with traditional national powers. “San Francisco has clearly imagined the possibilities of a city that is non-chain focused,” said Holmes.

Expect growth in cross-border investing, as, according to Retail West, San Francisco attracts Asian and European investors who will inject new concepts and money to fuel retail growth throughout the Bay Area.

Other scientific soothsayers, such as Marcus & Millichap, bear Retail West’s findings out, presenting evidence that San Francisco is weathering the housing slump far better than many other markets, based largely on its smart redevelopment efforts.

Clearly, smart redevelopment is the tack to take, whether on a real estate developersize, or a homeowner-size, scale.

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