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Retail Getting Reenergized in Silicon Valley

Northern California's Silicon Valley is showing renewed economic vigor, and retailers have taken notice.

Northern California’s Silicon Valley is showing renewed economic vigor, and retailers have taken notice.

Six years after the dot-com bubble burst, three major malls are expanding or beefing up their tenant rosters as competition intensifies in the high-tech center. There also is heightened interest in retail space for freestanding stores of all types catering to the Silicon Valley luxury market and its geek-billionaire mystique.

The mall projects are:

— A 240,000-square-foot expansion to the 1.4 million-square-foot outdoor Stanford Shopping Center in Palo Alto, which is owned by Stanford University and was leased four years ago to the Simon Property Group. There are 140 stores, and the anchors are Neiman Marcus, Nordstrom, Macy’s, Macy’s Men’s Store and Bloomingdale’s.

— Valley Fair, which is located in the cities of San Jose and Santa Clara and was developed by Westfield Group, based in Australia, wants to add 560,000 square feet for 55 stores and two more anchors. The mall now has 1.4 million square feet, 244 stores and three anchors: Nordstrom, Macy’s and Macy’s Men’s Store.

— San Jose’s Santana Row, an outdoor shopping-hotel-condo complex developed by Federal Realty, based in Rockville, Md., has become a magnet for young professionals who pack its restaurants and cafes. Santana Row has announced that Hennes & Mauritz signed a lease to open a 7,900-square-foot store this year, and BCBG Max Azria will expand. Santana Row, which has a Macy’s, along with 70 stores and 550,000 square feet of retail space, opened in 2002 and competes directly with Valley Fair across Highway 280.

Silicon Valley — or the Santa Clara Valley — got its moniker more than 35 years ago because of the area’s concentration of silicon chip manufacturers, which propelled high-tech growth. The valley, a one-hour drive south of San Francisco, has a population of 2.44 million, including 1 million who live in San Jose. The rest of the region is affluent suburban communities built on former almond, plum, pear and apricot orchards. The valley is spread over 1,200 square miles between two mountain ranges at the southern tip of San Francisco Bay.

Most important to retailers, the region is headquarters to many of the world’s most important technology companies, including Apple, eBay, Google, Yahoo, Intel and Hewlett-Packard. About one-third of the valley’s 1.2 million workers are employed in high tech.

“All these high-end retailers want to come here; they look at the demographics and say, ‘We have to have a presence,'” said Steve Sauter, senior broker in Palo Alto for real estate investment dealmaker Marcus & Millichap, based in Encino.

However, finding the right retail location is a challenge because of the lack of large parcels of land and/or big commercial buildings, as well as strict local zoning and land-use rules.

Communities are “struggling with the balance between maintaining…character and uniqueness and not just becoming a mall,” said Dale Achabal, director of the Retail Management Institute at Santa Clara University in the heart of Silicon Valley.

The strongest indicator of the improved valley economy is recent job growth, said Doug Henton, an economist with Collaborative Economics in Mountain View, Calif., which prepared the 2007 Silicon Valley Index for Joint Venture, a network of local governments and businesses.

Last year, for the first time since the downturn of 2001-2002, more jobs were created in the valley than were lost — the net gain was 31,869. Employment also has become more diversified with growing fields such as bio-tech and environmental technologies.

The increase in employment is reflected in the rising referrals to designer fashion specialty retailer Wilkes-Bashford, said Serita Sangimino, general manager of the regional chain based in San Francisco. Wilkes-Bashford is where Apple chief Steve Jobs buys his trademark, long-sleeved Brunello Cucinelli T-shirts, which Sangimino said cost $165 each at retail.

Even with the improved job creation, employment remains 220,000 below its peak in early 2001 at the height of the speculative Internet market, a deficit economist Henton said wasn’t as big as it may seem. Federal employment figures don’t take into account thousands of for-hire contractors and independent inventors in engineering and computer-related fields, he said.

Well-known valley innovators include twentysomethings Chad Hurley and Steven Chen, whose YouTube.com video-sharing start-up was bought last fall by Google — also the product of entrepreneurs — for $1.65 billion. There’s also Mark Zuckerberg, who three years ago started the social-network Web site Facebook that has been valued at $2 billion.

“There is a lot of money in the area,” said Mario Belotti, an economics professor at Santa Clara University, adding that the frenzy of growth more than a decade ago has not been matched. “The economy is growing, but more or less at the same rate as the national economy. Even in terms of IPOs, there are no situations now where you find a company that goes public at $12 and then at the end of the day sells for $80.”

However, pressures of supply and demand are apparent when it comes to the availability of retail space, according to Marcus & Millichap’s 2007 National Retail Report. In the San Jose/Silicon Valley area, the retail vacancy rate this year is forecast at 2.8 percent, down from last year’s 3 percent and 3.8 percent in 2005. By comparison, the Los Angeles retail vacancy rate this year is expected to decline to 6.8 percent, from last year’s 7.1 percent and 8.1 percent in 2005.

In San Jose, there is such a dearth of shopping that city officials estimate $2 billion a year is spent elsewhere on all consumer goods, including fashion.

“San Jose is 20 percent underretailed,” said Nanci Klein, an economic development executive with the city, which is projected to add 400,000 residents by 2030.

“The challenge in San Jose has been adding significant-size parcels to the retail base,” Klein said.

San Jose planners have been creative, she said. For example, space to build high-density, open-air shopping districts that include housing has been generated by recasting an old Palm Inc. corporate campus or a former General Electric nuclear reactor research center into mixed-use projects.

The region’s median annual household income remains far higher than the national level and is a magnet for retailers. The valley’s median income in 2005 was $76,300, compared with $46,326 for the U.S., according to the U.S. Census’ latest figures. In early 2001, at the dot-com peak, the median Silicon Valley household income was $83,000.

The income statistics don’t reflect the recent wave of employees exercising their hefty stock options, like the $2.6 billion in options that come due this year for some Google employees hired before 2004, when the Internet search engine went public.

Silicon Valley customers are increasingly diverse; 48 percent of the residents speak another language in addition to English, 23 percent are of Asian descent and 19 percent are Hispanic. Statewide, 42 percent of residents speak another language, and nationwide the number is 19 percent, according to Joint Venture. In addition, 55 percent of the scientists and engineers in the valley are foreign born, compared with 20 percent nationally.

At Santana Row on a recent weekend evening, the valley’s diversity was apparent as after-work shoppers strolled and diners filled restaurants. Young women were smartly dressed in jeans and trendy tunics, or short blazers. Men wore jeans and sport shirts and soft-looking leather loafers typical of the valley’s casual fashion tone.

“The consumer in Silicon Valley is more a cross-shopper,” said Fred Walters, general manager of Santana Row. “They’ll buy a Gucci handbag and then shop at Anthropologie or Urban Outfitter. They are not head-to-toe one particular brand.”

On a fashion note, economist Belotti observed, “They aren’t into, ‘Look, look, look at me,'” regardless of income.

However, Christine Campbell, a former technology marketing executive who now owns the women’s fashion boutique Crimson Mim in Los Altos, has detected an evolution of fashion savvy. Previously, the attitude was, “If you’re smart enough to start your own company, you don’t have to dress up for other people,” she said. “It was a question of credibility.”

Campbell’s 800-square-foot store is well-stocked with 100 lines, including shoes. For the valley’s 100 degree-plus summer temperatures, popular sellers include $295 ethereal peach silk sundresses with a leopard underlay by Claudette, based in Los Angeles. To wear to work, Campbell suggests a casual but crisp, $165 blue-and-white striped blouse by Alara with bishop sleeves and ruching at the torso, paired with $314 lightweight black wool trousers by Tibi and $245 Rachel Comey bejeweled slides.

“People here are wealthy; they travel a lot,” Campbell said. “They want something different, that’s not all over the place.”

That wealth keeps Valley Fair mall in the top five performing malls among Westfield’s U.S. properties, said Randall Smith, Westfield’s vice president for business development in the U.S.

As for Stanford Shopping Center, “There are clearly positive demographic trends in that market,” said Rick Sokolov, president and chief operating officer of Simon Properties.

Since 2002, annual sales per square foot at the shopping center doubled to $999, growth that Sokolov said had been achieved by adding higher-price tag retailers such as Louis Vuitton, Kate Spade and Burberry.