WHY WE BELIEVE WE’RE GOLDEN IN SAN FRANCISCO
After joining some industry peers for a recent Bisnow Retail Real Estate Summit panel discussion in San Francisco, it appears the REIT industry has consensus on several important business challenges and opportunities in the Bay Area.
My fellow panelists were Jeff Berkes, President, West Coast for Federal Realty Investment Trust, and Eric Hohmann, Managing Director, Property Investments for Madison Marquette.
Our discussion centered around five major trends in the San Francisco market that I wanted to share with you. I also wanted to tell you about how Kimco is taking advantage of these factors to strengthen its portfolio and help enhance its retailers’ businesses.
San Francisco’s accelerated economic recovery
San Francisco and the greater Bay Area have recovered faster than most U.S. markets. This is largely due to the area’s technology job growth. The number of high-tech services jobs has grown by 41 percent in San Francisco over the past two years, according to a recent CBRE report.
Kimco is seeing this growth drive more retail activity, with some retailers expanding into the market recently and rents increasing. We have been encouraged by this recovery, and we are continuing to target San Francisco as one of our top MSAs for investment. We feel comfortable increasing our investment in this area, and believe our portfolio will do well into the future due to the region’s accelerated recovery.
Slower growth in secondary and tertiary markets
The industry is seeing secondary and tertiary markets surrounding the Bay Area experience slower growth relative to San Francisco. This can be attributed to the sluggish recovery of small shops, many of which are still trying to find their footing. However, we believe the improved lending ability of small business institutions can help facilitate an upswing.
Kimco is helping fuel small shop recovery though our KEYS program, which offers new entrepreneurs a year of free rent at one of our shopping centers, as well as other resources to help them establish their business. We see our KEYS program as a significant opportunity to strengthen our small shops in the Bay Area and throughout our West Coast portfolio.
REITs’ redevelopment focus
New development is not a priority for most REITs, including Kimco. Rather we, as well as many of our peers, have focused on redevelopment efforts to reinvest in our properties, increase sites’ NOI, and maximize the value of existing locations. Some of our biggest redevelopment projects in the Bay Area include:
- Cupertino Village in Cupertino, Calif. We are evaluating a redevelopment opportunity at this center, which is adjacent to what will become the new Apple 2 Campus. We’re looking to add up to 25,000 square feet of new retail GLA and redesign the facade and improve the common area to complement the development of the Apple 2 Campus.
In addition, we are continually seeking new investment opportunities in the San Francisco Bay Area to strengthen our portfolio with higher-quality shopping centers in top-tier markets that offer greater growth potential.
Compressed cap rates in the Bay Area
We’ve watched the San Francisco Bay Area draw a great deal of attention from domestic and foreign investment communities over recent quarters, which has compressed cap rates on new acquisitions.
As a result, it can be challenging to find opportunities that meet our investment requirements and provide enough growth potential. However, we are remaining selective in our investment style, concentrating on our core properties of high-quality neighborhood shopping centers to meet our return expectations.
“Click and mortar” growth in San Francisco
The convergence of brick-and-mortar retail with online retail, also known as “click and mortar” or “clicks and bricks,” is impacting REITs and retailers in the Bay Area in ways similar to what we’re seeing nationwide. REITs must identify which of their tenants are most threatened by online retail, and manage that risk.
For Kimco, we are continuing to stake ground in necessity and everyday retail that does not translate well online, such as grocery stores, hair and nail salons, and gyms, to name a few categories. But we also recognize that online retail is here to stay, and stronger results can be realized by turning this challenge into opportunity.
So we are identifying, creating, and embracing the benefits that online technology can provide to drive foot traffic to our centers. For instance, we are working with our retailers, especially mom-and-pop shops, to enhance their customer touch points online and offline to drive in-store traffic. We are also helping our retailers ensure they’re providing an online-offline interaction that aligns with consumers’ expectations today.
In addition, our presence in the Silicon Valley has connected us to robust, next-generation technologies that we’re planning to create into a suite of services our retailers can use to enhance their shopping experiences.
We hope to share more on how these trends are evolving in San Francisco and what they mean for Kimco’s portfolio in future blog posts. If you were at the Bisnow panel, what takeaways did you glean? If not, what’s your perspective on the Bay Area market?