A host of national retail bankruptcies in 2023 seem to have the potential to disrupt a rebounding retail real estate market. Leslie Mayer, an Executive Managing Director at Cushman & Wakefield and Ivan Gold, an attorney at Allen Matkins, weigh in on the effects these occurrences will have on California’s retail space, as part of the Summer 2023 Allen Matkins/UCLA Anderson California Commercial Real Estate Survey.

Newly Available Retail Space Can Foster Growth in Emerging Markets

The recent bankruptcies of large national chains indicate a negative trend in retail. Shuttered doors will inevitably evoke questions regarding the viability of the retail industry and how it will affect landlords.

While there certainly is an influx of vacant retail space, where others might see failure, Ivan Gold sees opportunity. The stream of bankruptcies “is creating an environment in which there is a lot of vacant space for opportunistic and growing retailers to take advantage of available real estate ...” Strong and emerging markets that are occupying these spaces include off-price apparel, bookstores, furniture uses and health and fitness uses.

Flourishing Retailers Can Use Newly Vacated Spaces to Expand

A tight market resulting from a post-COVID rebound in retail space stunted the ability of many retailers to expand.

In this vein, Leslie Mayer also sees optimism and opportunity despite the negative news headlines. “The recent slew of bankruptcies for well-known retailers has actually created greater opportunity for existing retailers who have been stymied or been unable to find space in certain markets.”

Since COVID, retailers have had to pivot business practices during lockdowns — and then consumers hesitating to walk into their physical locations — to stay relevant. Curbside pickup, promoting a sanitary environment, and providing a more engaging experience helped minimize setbacks for owners. Strategic direct-to-consumer sales allowed retailers to compete for business with the e-commerce market and look to pick up much-needed square footage to expand their operations and offerings.

The New Era of Consumers May Prevent Retail Vacancies From Hitting the Market

Landlords must also draw in online shoppers by innovatively structuring a more palatable shopping experience. Many owners are not even looking to fill their vacancies. Mayer notes, “Landlords are also finding an opportunity to get back spaces pivotal in releasing and repositioning their centers to continue to be competitive and interesting to the consumer.” She relays that developers are creating a more inviting environment with fountains, parking, green spaces, and entertainment.

Mayer also mentions a new consumer dynamic created during the post-pandemic environment. “[Since most people have been working from home the past few years], they want to get out. They want to see new things, touch and feel, interact, have the social engagement ...” California weather is optimal for outdoor seating, light entertainment, and other amenities that will attract consumers.

Construction Costs and Regulations Will Keep Retail Pricing Moving Upward

Despite the market in many areas of California still not returning to pre-COVID levels, retail space vacancies will continue to dwindle, and prices will continue to rise in the long term. There are several factors leading the trend down this path. Both Mayer and Gold agree that limited retail development in the short term will have enough of an impact to counteract any slowdowns in the retail industry.

Gold points to a statewide shift in the mindset of policymakers. Where in the past, there was a desire for commercial development for benefits such as sales tax revenue, the growing population is creating a push for more residential. “... in California specifically, the regulatory and permitting environment has changed to create a priority in the development of housing ... So if we have a hypothetical piece of vacant land virtually anywhere in the state of California, the state is going to want you to build multifamily housing on it, before it wants to build a new retail building.”

Mayer states that viability will suppress the market. “Given the lack of new construction because of construction costs rising so rapidly, the opportunities now for existing space are that much more compressed.”

For the foreseeable future, retail space will be limited in California.

The Future of Retail in California

There are still floundering areas in California. Gold notes that there are some trouble spots in urban areas most affected by the pandemic and return-to-work issues, “such as San Francisco in particular, but to a lesser extent, San Jose and Los Angeles, by example ... Driving around, you will find vacant storefronts at street level in what were traditional mixed-use developments.”

But building off the success of the past years, both Gold and Mayer see a favorable future for the retail space in California. Innovative mixed-use projects in a variety of markets will continue to be popular, and, ultimately, hindrances to new development in the retail space will keep supply lower than demand and in favor of landlords.