California Leasing Landscape
The leasing landscape in California has witnessed a significant shift, particularly in the retail sector. With work-from-home (WFH) policies becoming more common, the average workweek decreasing, and a high percentage of millennials deciding to move out of major cities, leasing has seen quite a turn in the last year. Other notable leasing trends include a rise in the popularity of California restaurants, big box spaces shifting focus, and deals taking longer to close. The California leasing market is undergoing a transformation several investors did not see coming in their 2023 predictions.
Impact of Remote Work
According to a recent statewide survey conducted by the Public Policy Institute of California, about 16 percent of California residents exclusively WFH. An additional 19 percent have a flexible work arrangement involving part-time remote work. If given the option, a significantly larger proportion of Californians would opt for remote or hybrid work arrangements: 29 percent expressed a desire to work from home full-time, while 32 percent expressed interest in a hybrid setup.
The significant change in work patterns has brought about a transformation in numerous regions of California. Remote work has enabled specific individuals to relocate from areas with high living costs, predominantly urban centers, to more affordable neighborhoods. This shift encourages
urban areas to explore innovative approaches to sustaining vibrant downtown economies.
An example of this coming to fruition is in Downtown San Francisco, a region extremely reliant on office workers. According to the Insider, over 18 million square feet of San Francisco’s office space is vacant. At the same time, tech companies have closed their physical office locations, adding to the continuous news stream about layoffs. San Francisco’s famously flexible WFH policies may have cost the city billions. Workers in San Francisco are spending roughly $3,567 less per year on things like entertainment, dining, and shopping near their places of work. As stated by the WFH Research Group, the 34.7 percent decrease in San Francisco’s in-person workforce has decreased overall downtown spending.
According to CoStar Group, in 2020, as the pandemic struck and San Francisco implemented a prolonged lockdown, numerous tenants seized the chance to depart from the city and seek more affordable options elsewhere – the suburbs. Nearly 10,000 rental units were left vacant, causing the vacancy rate to rise to 11.3 percent, and market rents experienced an 11 percent decline. San Francisco’s recovery has been sluggish compared to the swift improvements in most other prominent markets. The city currently exhibits some of the lowest metrics for employees returning to office spaces in the entire country.
Several companies have begun packing up their urban operation and relocating to the suburbs to meet customers where they live and work. This trend will likely continue as the popularity of remote work continues to skyrocket.
Restaurants are Thriving
A significant number of restaurant owners are optimistic about growth for the remainder of 2023. The majority of operators believe that business conditions are either already close to a new, more positive normal or are progressing well toward that goal. The primary emphasis is on maintaining and sustaining growth in the upcoming year. This trend remains true for California restaurants as well. If there is a second-generation restaurant on the market, it is getting leased quickly, according to Matthew Sunberg, AVP and Associate Director at Matthews Real Estate Investment Services™. Ramen, hot chicken, and salad concepts are multiplying. According to Timeout, Los Angeles is home to the country’s best ramen scene, which has caused a significant increase in the number of Ramen restaurants throughout the state.
One particular fast casual restaurant performing well throughout the state is the Los Angeles based chain, Sweetgreen. In fact, the company announced in its Q1 earnings call in early May that it was closer to closing its debt than in 2022. In the quarter ending on March 26, the chain based in Los Angeles experienced a five percent year-over-year increase in same-store sales. Sweetgreen is currently experiencing positive developments on multiple fronts. Along with successfully managing its debt, the expanding brand is preparing to launch its inaugural Infinite Kitchen, a store design featuring an automated makeline.
Sweetgreen has seen excellent success in the suburbs. In 2019, approximately 35 percent of its footprint was in suburban areas. However, by the summer of 2022, the proportion had increased, with half of its locations now in the suburbs. This transition indicates a notable strategic move by Sweetgreen to cater to suburban markets and tap into their potential customer base.
California restaurants are seeing increased foot traffic by elevating their outdoor ambiance. Tenants love a patio and creating great energy with high visibility in a busy center. This desirable feature not only allows them to take advantage of the outdoors but also contributes to the creation of a lively ambiance. The patio’s strategic placement, combined with its high visibility in a bustling center, catalyzes attention and generates positive energy. By offering a space where customers can relax, dine, or socialize, the patio becomes a valuable asset that enhances the overall experience and appeal of the establishment.
California Ghost Kitchen Updates
A ghost kitchen or virtual restaurant are spaces for operators to create food for off-premises consumption. As a hub for culinary innovation and technology, California has seen a proliferation of ghost kitchens across various cities and regions. This trend is expected to continue as the food industry evolves and adapts to changing consumer preferences and the digital marketplace. There are many ghost kitchens throughout the area; some of the most popular ones include Joint Venture Kitchen, Collaborative Kitchens, Oakland Food Hall, and DoorDash Kitchens.
According to CNBC, Chipotle Mexican Grill has introduced a new spinoff named Farmesa Fresh Eatery in California, which operates within a ghost kitchen.
Big Box Spaces Shifting Focus
According to Sundberg, Macy’s and Dillards are no longer leasing big box spaces. The focal point for these spaces has shifted towards entertainment, with swim schools, pickleball courts, trampoline parks, rock climbing gyms, and similar venues becoming ideal occupants. These establishments attract significant foot traffic and foster excellent synergy. As tenants recognize their reduced space requirements, they are downsizing accordingly. Previously, big box spaces primarily catered to toys, sporting goods, and office supplies, but now a wider range of users occupy these areas.
This shift is largely attributed to the significant changes that the retail landscape has undergone over the last few years. With online shopping gaining popularity and impacting large retailers such as Macy’s and Dillards, big box retailers are seeking new strategies to attract customers and diversify their offerings. Additionally, entertainment tenants provide a more unique and immersive experience that cannot be replicated online. This helps big box retailers draw in a larger audience that encourages consumers to spend more time and money.
Extended Deal Time
In the current climate, there has been a noticeable increase in the duration of deal closures. Effective communication has emerged as a critical factor for brokers in navigating this situation. Brokers must engage in thorough discussions with external brokers and their clients, going above and beyond by employing extensive communication measures. This ensures that all parties involved have a comprehensive understanding and alignment regarding the deals.
Furthermore, it is essential to acknowledge the presence of contingencies. There are prolonged processing times associated with permits when dealing with municipal authorities and extended timelines for construction projects. In order to mitigate any potential disruptions, it is crucial to establish a shared understanding and ensure that everyone involved possesses a thorough comprehension of the deal, thereby minimizing the occurrence of any unforeseen obstacles or challenges.
