California Issues Guidelines for More Pandemic-Related Retail Openings

Rules Also Cover Manufacturing, Logistics and Other ‘Low Risk’ Locations Serving Stores

California Gov. Gavin Newsom announced guidelines allowing low-risk retail and industrial facilities to reopen starting Friday. (Gage Skidmore/Flickr)California Gov. Gavin Newsom announced guidelines allowing low-risk retail and industrial facilities to reopen starting Friday. (Gage Skidmore/Flickr)

California officials issued second-stage guidelines intended to put more retail, logistics and manufacturing companies on a path to post-coronavirus pandemic normalcy starting Friday, allowing them to reopen with necessary site modifications and precautions.

Guidelines announced by Gov. Gavin Newsom, and posted on the state’s pandemic response website, are similar to those issued earlier for businesses that were deemed essential in the state’s first phase of response to the virus, such as grocery stores, drugstores, banks and gas stations.

Those businesses are required to provide the high levels of sanitation, social distancing and other protocols to try to prevent the spread of the virus. If they follow the same standards, more businesses deemed “low risk” for virus transmission can open for business Friday, including retailers selling clothing, sporting goods, toys, books, music and flowers. The same state standards would generally also apply to manufacturing, warehouse and other logistics businesses serving retail customers that could be eligible to begin to reopen.

The new guidelines are the first in a series that are scheduled to be issued in coming weeks to help the 70% of businesses in California’s economy that are still reeling from stay-at-home orders issued by the state in mid-March. Newsom said practices will be subject to adjustment over the course of a total of four phases of reopenings that could play out over the course of several months.

“This is not etched in stone,” Newsom said of the latest guidelines. “We want to continue to work with people across sectors and address unintended and not just intended consequences of these meaningful modifications of the stay-at-home order.”

Since many retailers are small businesses, owners will be left to decide their own opening timelines based on the extent to which they are able to invest in the personnel and other expenses required to enforce social distancing, hygiene and other elements already being carried out by essential businesses such as supermarkets.

For instance, the state’s new retail guidelines call for businesses that open to provide temperature or symptom screenings for all workers at the beginning of their shifts and for any work-related personnel entering the facility. Protective gear should be supplied by the business to cashiers, baggers and other workers with “regular and repeated interaction with customers.”

The guidelines encourage the use of pickup and delivery services like those already being used by many stores and restaurants to minimize in-store contact and maintain social distancing. The rules acknowledge that may not be an option for all types of retailers, because of the ways in which people browse and shop depending on the product.

The retail guidelines call for closing in-store bars, bulk-bin options and public seating areas, and also for discontinuing product sampling.

Slow Recovery

While many retailers may be legally able to open their doors, some may still wait to do so, according to brokers. The restrictions may still pose logistical and financial challenges that could not end up being worth the effort.

“For clothing stores or shoe stores or others where there is a need to try things on and get the right sizing or fit, there isn’t any advantage to have people pick up curbside,” Mike Moser, partner in San Diego-based brokerage firm Retail lnsite, told CoStar News.

“And for shops where people browse through and purchase, the thought that these retailers are going to be able to do any business with a curbside pickup isn’t a solution that helps nor does it make that much sense,” Moser said.

Under the state guidelines, retailers will be able to operate at no more than 50% of normal capacity, and are advised to be “prepared to queue customers outside while still maintaining physical distance, including the use of visual cues.” In grocery stores, for instance, those cues have included floor markings intended to keep customers six feet apart in checkout lines.

Moser said small retailers want to open for business in a safe manner, but many may decide to wait because those modifications will not pay off when store traffic is lingering between 25% and 50% of normal capacity. Operators have staffing, inventory replenishment and other costs to consider in addition to the coronavirus-related modifications.

Newsom said another set of openings for the current second phase is being worked out, and details are expected to be announced in coming weeks for modified on-site restaurant dining, as well as the operating of outdoor museums, car washes and other low-risk businesses.

A return to more crowded settings such as office buildings, gyms and bars is not likely to occur until the third phase in California, and full operating of most types of businesses and public spaces won’t happen until the fourth phase. Newsom said the state is currently allowing counties to proceed faster with openings than the state if they can certify progress in areas such as infection and death declines, and increases in testing for the virus.

Officials of some hard-hit cities, including San Francisco and Los Angeles, have already said they will be proceeding slower than California as a whole when it comes to current and future business openings.

The Commerce Department reported that nationwide retail sales dropped 8.7% from a year ago in March, the sharpest plunge on record, with apparel store sales down 50% and restaurants and bars dropping 26%,

April U.S. retail figures are not yet available but are likely to show steeper declines, reflecting a full month of retail closings compared with March’s half month.


Posted on August 13, 2020 at 6:24 pm
Cara Milgate | Posted in Commercial |

Office Sublease Availability in San Francisco Jumps By 1 Million Square Feet in 2020

CoStar Insight: Further Rise Expected as Tech Firms Slash Payrolls

If you’re currently looking for office space in San Francisco, there’s a good probability that you’ll be considering a sublease option. Roughly 30% of the available space in the market is listed for sublease from an existing or prior tenant, rather than from a landlord directly.

In January, CoStar was tracking just over 5 million square feet of available sublease space in San Francisco. As of early May, sublease availability jumped another 1 million square feet, to over 6 million square feet total, representing roughly 3.3% of total market inventory. By comparison, direct space availability totals more than 14 million square feet, or 7.8% of total inventory. Largely driven by the recent rise of sublease space, total availability in the market has now eclipsed 11%.

San Francisco now has the highest sublease availability rate across the country, significantly outpacing the second place San Jose market, where 2.4% of existing inventory is available for sublease. San Jose had maintained its ranking as the country’s most saturated market for sublease availability from the second quarter of 2017 through the third quarter of 2019, which was partially driven by consolidations in the semiconductor industry. But sublease availability in San Jose steadily declined in 2018 and 2019, while it has recently spiked in San Francisco.

The rise of sublease listings in San Francisco can largely be attributed to cost-sensitive businesses leaving the market, as well as technology tenants banking space for future growth or coming to the realization that they will not fulfill aggressive growth plans. And now, victims of the coronavirus pandemic’s shelter-in-place and social distancing measures have begun to shed space as well.

New listings in the market include 55 Hawthorne St., where KeepTruckin has offered 34,108 square feet for sublease. The unicorn startup that helps truck drivers log hours laid off 349 employees in April, or 18% of its global workforce.

Credit Karma moved into the Phelan building at 760 Market St. in 2014, and expanded in 2017 to a footprint spanning 121,000 square feet. In February, the company listed two floors for sublease, totaling 24,320 square feet.

Macy’s announced plans to close its tech offices in San Francisco and is moving positions to New York to streamline operations. Accordingly, Macy’s.com listed its office at 680 Folsom St. for sublease in January. The eight vacant floors total 272,401 square feet, encompassing half of the building. Macy’s employed 880 full-time workers and about 200 contractors in the building.

At 795 Folsom St., the defunct robotics-enabled Zume Pizza has offered 64,177 square feet for sublease. The start-up cut 80 San Francisco-based positions in January and shut down pizza delivery operations after four years in business.

With tech firms in hard-hit segments of the economy slashing jobs and small businesses clamoring to obtain payroll protection loans to stay afloat through the recession, it’s likely that sublease space will continue to flood the market in the year ahead.

In the first week of May alone, Airbnb announced the termination of 1,900 employees, or roughly one-quarter of its workforce, and Uber said it is slashing 3,700 positions, or 14% of its workforce, while Juul recently announced plans to move out of the city and cut roughly 25% of its U.S. staff of 1,800. All three firms expanded offices in the city substantially during the expansion cycle.

Lyft likewise announced cuts of 982 one week earlier, and Yelp slashed 1,000 jobs in early April. Opendoor and Eventbrite cut 600 and 500 jobs, respectively, last month.

Exacerbating the effect that severe job losses and business failures will have on demand for space in the San Francisco office market, a CoreNet Global survey conducted between April 22th and 27th found that 69% of end users surveyed say that their company’s real estate footprint will shrink as a result of increased work from home. With excess space on hand, even tenants that survive the recession may consider subletting portions of their offices to others in order to recoup costs.


Posted on August 13, 2020 at 6:23 pm
Cara Milgate | Posted in Commercial |

Coronavirus Reveals the Weak Links in Global Supply Chains

CoStar Insight: Why China Stands to Lose and US Stands to Benefit in the Wake of COVID-19

Most manufacturing is expected to reshore to other parts of Asia post-pandemic, a factor that will help keep steady port traffic in West Coast markets such as Los Angeles, Seattle and Oakland. (iStock)Most manufacturing is expected to reshore to other parts of Asia post-pandemic, a factor that will help keep steady port traffic in West Coast markets such as Los Angeles, Seattle and Oakland. (iStock)

The COVID-19 crisis has profoundly affected global economies in an unprecedented way, putting millions out of work all at once, slowing commerce to a crawl and wreaking havoc on equity markets. And yet the effects of the pandemic may also prove instructive, illustrating plainly some of the systemic weaknesses and deficiencies that were papered over and unexposed during the steady economic growth of the most recent expansion.

In particular, supply chains of unwieldy length depending solely on Chinese manufacturing and ports have shown themselves to be extraordinarily brittle. Also, confidence in the trustworthiness of the Chinese government after initial assurances minimizing the severity of the COVID-19 crisis was found to be misplaced, resulting in an erosion of trust after the government reversed its previous stance and forced manufacturers to shut down operations in January.

Given the lessons being swiftly taught worldwide by breakdowns in supply chains for businesses and consumers alike, there are ramifications that should have long-lasting and far-reaching impacts for manufacturers, domestic markets and ultimately industrial investors looking to capitalize on the shifting composition of supply chain management.

Although the true extent of the frailty inherent in supply chains built without redundancies may just be coming to light, it is likely that the current state of the global economy may only exacerbate trends that were already taking place. Spurred by a number of concerns, including rising wages, total cost considerations and an administration driving an extended trade war with China, the average monthly value of imports from China fell more than 6% between 2015 and 2019, a drop of nearly $2.6 billion.

Over the same period, U.S. imports from other Asian countries, the European Union and Mexico all grew by double-digit percentages, with Vietnam in particular appearing to pick up a great deal of the slack afforded by China’s diminished export numbers. The conclusion appears certain: China cannot remain the world’s sole factory for the long term, and numerous other destinations look set to reap the rewards.

The most likely outcome of the shakeup prompted by the COVID-19 outbreak is a greater focus on building redundancies and increased resiliency into supply chains at all levels. No single country is likely to benefit in a lopsided manner from firms moving production out of China. Instead, a combination of reshoring, which involves shifting operations either to other Asian nations with low-cost labor pools or to regional trading partners like Mexico or Canada, and onshoring a smaller amount of production back to the U.S., will allow companies to diversify supply chains and mitigate the supply risk associated with concentrating in a single nation.

For companies that have chosen to onshore production after a sustained period using offshore suppliers, a number of negative factors related to supply chains prompted their return. Though quality of work and necessity for rework was cited a quarter of the time among the top 10 reasons for abandoning an offshoring strategy, freight costs, delivery or inventory concerns and supply chain interruptions made up 40% of the negatives associated with the practice, according to a 2018 study by Reshoring Initiative.

Similarly, among the benefits cited by respondents to the study were lead times, supply chain optimization and proximity to market, altogether accounting for 34% of the top 10 positives for onshoring production.

It should be noted that most onshored manufacturing is often highly complex, high-value-add work producing goods such as computer, electronics, auto and heavy equipment. This type of manufacturing is also extensively automated, and requires higher skilled workers for the jobs that do end up being created.

A distinct lack of those highly skilled workers domestically limits the amount of offshore jobs that are likely to return onshore from places like China. In contrast, manufacturing goods that require low-skilled labor and are difficult to automate constitute the bulk of production being reshored elsewhere, and are almost certainly not going to return to the U.S.

For industrial investors domestically, an added benefit may be found in inventory shortages created by the crisis. For decades, one prevailing motivation for supply chains was suppressing costs through just-in-time strategies, implementing push-pull management or other ways to reduce inventory and associated holding costs. Inventory-to-sales ratios dropped across the board prior to the Great Recession, most precipitously for manufacturers. The relatively recent rise in e-commerce forced a moderate rise in inventories, though remaining well below the ratios of the 1990s and early 2000s.

Now, however, with widespread demand causing unforeseen shortages for consumer goods, intermediate goods and raw materials alike, it is not unreasonable to expect that firms at a number of levels in the supply chain will see the added benefit of increasing inventories in the short or medium term, despite the associated storage costs. That should contribute to minor increased demand for warehouse space once economies begin to reopen, and will likely push average inventory to sales ratios above 1.4 for the manufacturing and retail segments of the market.

Given that this is largely in response to COVID-19, a “black swan” occurrence, companies are unlikely to sustain heightened inventory carrying costs permanently. Rather, this should prove to be a one-time boost for the segment when entering the next expansionary cycle and then dissipate along with the psychological effects of current shortages.

There are a number of considerations for investors targeting markets that are likely to experience tailwinds from reshoring and potential onshoring of manufacturing from China. Most manufacturing is expected to reshore to other parts of Asia, a factor that will help keep steady port traffic in West Coast markets such as Los Angeles, Seattle and Oakland, and East Coast ports such as New York, Norfolk, Savannah and Jacksonville should see similar returns to stability in the numbers of imported TEUs, or 20-foot-equivalent units, a measurement used in the maritime industry to record international containerized freight volumes.

Increased manufacturing activity in Mexico could likewise boost industrial demand in Los Angeles and the nearby Inland Empire, but could also provide additional demand in Texas markets and eastern ports.

For markets likely to experience smaller boosts from onshoring of overseas production, it’s evident from jobs created from onshoring operations between 2010 and 2018 that Southern markets are heavily favored given their lower costs for labor, the often considerable subsidies made available by these states and business-friendly policies that eschew red tape and barriers to entry. Additionally, the same states are usually equally popular for foreign manufacturers looking to locate manufacturing facilities in the U.S. market.

Though industrial investors in states attractive to firms considering onshoring will benefit directly from increases in the local manufacturing base, the reality of increased reshoring rather than onshoring should reinforce already established national and regional distribution hubs over the longer term, allowing crucial increased stability of supply chains globally and helping to mitigate risk for industrial assets across the U.S. from future disruption.

While this may be of little help in the current crisis, it is reason for cautious optimism for industrial investors looking ahead to a return to economic normalcy.


Posted on August 13, 2020 at 6:23 pm
Cara Milgate | Posted in Commercial |

Plunge in Bay Area Leasing Activity Highlights Challenges Moving Forward

CoStar Insight: Weekly Figures Showcases Coronavirus’ Effect on Retail Sector

The unprecedented drop seen in new leasing activity around the San Francisco Bay Area is hardly surprising given the limitation on the population under the current shelter-in-place order, which went into effect on March 17 and closed all non-essential businesses, sending shockwaves through the retail industry.

In the commercial property sector, the inability to have physical property tours limits the ability of landlords and brokers to showcase available retail spaces. New retail tenants are likely tentative, given the uncertain outlook for an economic recovery and a return to relatively normal social interactions and commercial consumption levels. And owners are struggling with the ramifications of lost rental revenue and the challenges in keeping occupancy rates up in buildings, potentially attempting to renew existing tenants early.

In an analysis of new retail leasing in seven Bay Area metropolitan areas, including San Francisco, San Jose, East Bay, San Rafael, Santa Rosa, Napa and Vallejo-Fairfield, leasing volume has plummeted to historically low levels. The seven weeks from mid-March to the end of April saw average weekly leasing activity of just 36,000 square feet. To give that figure further context, the average weekly leasing volume since 2007 across the Bay Area is over 120,000 square feet.

While it isn’t unexpected that newly signed leases have been almost non-existent in recent weeks, it does highlight yet another obstacle the retail property sector is going to have to overcome. Businesses will close as a result of the current economic downturn, leaving more vacant space in need of new tenants. The stark slowdown in leasing activity could leave a gap in new demand entering the market just as vacancies start to increase, exacerbating increases in near term vacancy rates. And restarting the leasing engine will be a crucial factor in gaining some positive momentum in the retail property market.

The effect on retail rents is expected to be negative as well. Rising vacancies and a strong pullback in demand should result in declining rental rates as owners look to fill empty retail spaces. It will be worth keeping a close eye on available space in the coming months. Across the Bay Area, availability is below 5% on average, with availability registering 5% in the East Bay, 4% in San Jose, and just over 4% in San Francisco.

From a slightly more optimistic perspective, the Bay Area retail market performed relatively well through the previous economic expansion period following the Great Recession. Strong economic and population growth in the Bay Area, along with limited supply pressure, helped to maintain healthy market fundamentals. And the Bay Area is forecasted to fare better from an employment and economic growth perspective than many other areas of the country in the coming years. So, while challenges are abundant for the retail sector, Bay Area properties may be able to outperform national trends through the current downturn.


Posted on August 13, 2020 at 6:22 pm
Cara Milgate | Posted in Commercial |

Retail Loan-To-Value Levels On Steadier Footing Heading Into Economic Downturn

CoStar Insight: Retail Properties Facing Major Headwinds, But Debt Levels Are Lower Than Just Before Financial Crisis

Retail investors and lenders have been far more conservative in recent years compared to the years leading into the Great Recession. (CoStar)Retail investors and lenders have been far more conservative in recent years compared to the years leading into the Great Recession. (CoStar)

Retail properties are expected to have the most challenging road forward due to the acute effects that the coronavirus pandemic is having on the sector. Shelter-in-place orders, which began in mid-March in the San Francisco Bay Area, have been extended through the end of May, placing significant pressure on retail property incomes.

In the most recent March retail sales report from the U.S. Census Bureau, total retail sales retreated 8.7% across the United States, the worst monthly decline since the data became available in 1992. The hardest hit retail sector was clothing stores, which saw sales decline by 50%, according to the report. And furniture, bars and restaurants, and sporting goods all saw sales declines of over 20%.

Given the stress that retail property financials are undergoing, it is worth looking at leverage levels in some of the larger retail property sales in recent years compared to the levels seen prior to the Great Recession of 2008.

The loan-to-value analysis takes a broad, high-level look at the 40 largest transactions across the San Francisco, South Bay/San Jose and East Bay/Oakland metropolitan areas, where CoStar has data on loan amounts. Despite the broad view, it does give insight into the comparative lending trends for retail properties, and the relative risk for property loans compared to recent history.

Comparing the relative ratio of loan-to-value figures — the ratio of a property’s sales value to the amount the buyer financed on the deal — shows that there were significantly higher leverage levels undertaken in retail asset purchases during 2006-2007 compared to 2018-2019.

In 2006-2007 over 10% of the 40 largest retail transactions in which CoStar captured loan financing with LTV ratio’s over 80%, compared to 0 from 2018-2019. Properties with LTVs between 60% and 80% represented 45% of the sales in 2006-2007 compared to just 20% in 2018-2019. And while sales with LTVs lower than 60% accounted for 45% of retail sales from 2006-2007, 80% of the sales in 2018-2019 had LTVs 60% or below.

Clearly, retail investors and lenders have been far more conservative in recent years compared to the years leading into the Great Recession. And landlords appear to have more sustainable mortgage payments relative to their property’s net operating incomes.

This is to be expected, given changes in the financial industry stemming from the financial crisis and changes in consumer behavior as e-commerce has risen significantly in popularity. Retail properties will need all the help they can get to avoid a wave of distressed selling, which would further damage a sector already facing a number of major headwinds moving forward.


Posted on August 13, 2020 at 6:21 pm
Cara Milgate | Posted in Commercial |

California Moves to Let Next Wave of Retailers Reopen in Pandemic

Governor: Clothing, Sporting Goods, Flower Stores to Sell Items Starting Friday

Gov. Gavin Newsom said counties in California are being given more leeway to decide the pace of business openings based on local circumstances, provided they file contingency plans with the state. (Getty Images)Gov. Gavin Newsom said counties in California are being given more leeway to decide the pace of business openings based on local circumstances, provided they file contingency plans with the state. (Getty Images)

Gov. Gavin Newsom said California can begin moving into a second phase of business openings starting as early as Friday, allowing for stores that sell items such as clothing, sporting goods, toys, books, music, and flowers to begin to operate primarily through pickup services if modifications are made to their real estate.

The stores that permitted to reopen late this week will be required to modify their locations but details for low risk businesses, along with the manufacturing and logistics providers who serve those retailers, are expected be issued Thursday.

The announcement comes as the state is in its seventh week of a stay-at-home mandate, which is increasingly facing opposition and protests by some cities and residents as the economy sags and unemployment increases.

Newsom said Monday during his daily press briefing that the decision to move into the upcoming phase of new “low risk” retail openings was based on the criteria he laid out last month for his phased reopening plan, based on factors including the state’s and cities’ progress with medical preparedness, testing and contact tracing for the spread of the virus.

“This is a very positive sign and it’s happened only for one reason: The data says it can happen,” Newsom said.

The nation’s most populous state, California was among the first states to issue at stay-at-home order in response to the coronavirus in mid-March. Its economy, one of the largest in the world, has been hard hit by the ripple effects of the closing of nonessential businesses, increasing unemployment and people staying at home. In the past couple weeks, protesters have gathered in Sacramento and Orange County cities including Huntington Beach calling for the order to be lifted. A few cities have defied orders, lifting some restrictions and opening some public areas such as beaches.

Newsom has said he remains focused on stemming the spread of the virus and plans to reopen the state in phases based on “facts and data, not ideology.”

This week’s openings do not include business offices, sit-down dining establishments, or shopping malls, which have all been closed for the past several weeks by the coronavirus pandemic, the governor said. More types of businesses are expected to be included in a later part of Phase 2 openings, which are also expected to be decided based on the virus data and preparedness factors.

Sonia Angell, director of the California Department of Public Health, said the state plans to issue guidelines for allowing certain counties and other regions not hit hard by the coronavirus to speed up openings of other types of businesses, provided they submit contingency plans in advance to the state.

Newsom said those lesser-hit counties could get more leeway in opening certain hospitality-related businesses, such as hotels and restaurants, which have been among the hardest-hit businesses in terms of closings and job losses.

The governor said further openings depend on Calfornians feeling safe and confident enough to enter these businesses, even with the proper safeguards. Governments in hard-hit areas including the San Francisco Bay Area have been granted the right to maintain tougher standards apart from state relaxations where necessary.

Newsom did not provide a timetable for what would be a next wave of new statewide business openings during the current second phase, with an eventual statewide third phase to include more relaxed restrictions for places such as offices, gyms, bars, salons and other types of service businesses that have the most user interaction.

Ryan Patap, director of market analytics for CoStar Group in Los Angeles, said Monday’s announcement marked a “nice beginning” for opening up the state beyond the essential businesses currently in operation, but California remains a long way from seeing positive demand for retail real estate make a comeback.

“The environment for brick-and-mortar retail remains highly uncertain,” Patap said. “Even if allowed, how many consumers will be fearful of leaving their home to patronize retailers? Even if stores see customers come back, will retailers generate sufficient sales to justify staying open?”

Retailer confidence at this point appears to be as much an unknown as consumers’ attitudes toward returning to these businesses.

“Will we have another outbreak in which we need to shut down again?” Patap added. “These are only a few of the questions that must currently be going through retailers’ heads. What retailer is going to commit to a new lease?”


Posted on August 13, 2020 at 6:20 pm
Cara Milgate | Posted in Commercial |