California and the upcoming War on Retail

[Alpha8472]

I would say that some residential and commercial mixed together is a more reasonable compromise. They can both coexist. The city of Walnut Creek for example is building tons of condominium mini-towers all over the city. The condo growth has exploded over the past decade. The result is the downtown outdoor mall Broadway Plaza has suddenly reaped incredible profits from all those rich condo dwellers. Walnut Creek has rich people like never before. There are even free buses to the ritzy downtown area and the stores are doing good business. This is a city in California that has no homeless problem. The police are so strict that they clear the streets of homeless. Walnut Creek is the opposite of San Francisco and it is only about 20 miles away.

The streets are clean and very safe. People all rage on about California and its homeless problems. Not all of California is like that. The large city of Walnut Creek and the huge suburbs of San Ramon, Danville, Alamo, Dublin, Pleasanton, etc. are clean and wealthy. There is no homeless problem and crime is very low. Sure there may be a few instances of a flash mob robbery, but these were a once a year thing by people driving out from Oakland or San Francisco. Yes, we lost a few places to condos, but the places that we lost were a McDonald's and Fuddrucker's. There is no McDonald's in the entire city of Walnut Creek. The city banned drive thru restaurants in the downtown area.

The CVS store in downtown was planned to be demolished for condominiums. However, that has not happened yet. There can be a compromise. There can be retail on the ground floor and then condo towers on top. The condos will probably even have a drugstore on the ground level.

[veteran+]

What is hard to comprehend in California is the fact that you can't get approved for a basic housing tract of single family homes with modern materials, solar power etc. on bare land due to the "severe environmental impact" - but on these commercial reuse plots they are going at least 5 to 6 stories and absolutely packing the property with ten times as many cars and people than would live on a 10 acre housing tract. The removal of all green and open space in these retail centers contributes to urban heat islands that raise the temperature in the area. Whether or not you believe in climate change (this is not a good place to debate political issues), there is zero doubt that if you pave large swaths of area 100% and build with high density homes all with Central HVAC needed to get basic air circulation the temperature increases in that area significantly.

In Long Beach this proposed demolition of the new Marina Shores center is a perfect example. Across the street is a long underutilized plot of land that used to just be a pumpkin patch and Christmas tree farm each year. This would be an ideal place to build apartments. But again simple single family homes were determined by the city and coastal commission to be far too polluting for this property so it sits vacant and creates a dust bowl that pollutes the air and nearby homes and businesses whenever the winds kick up. Yet there is zero opposition to demolishing the nice shopping center replacing it with hundreds if not a thousand new apartments. Each of which will park at least one car. The area is already congestion central and the idling cars smogging up the area will only be worse as traffic snarls to get all these people into this packed apartment complex. And the reality is that this kind of intensive reuse is not profitable for the developer unless the entire project is ultra high density and "luxury" rentals. I've always been amused about "luxury" apartments - in my apartment search in South Orange County years ago I learned that "luxury" vs. "regular" basically means two tone paint and a cheap tile backsplash in the kitchen for at least $750 more per month.

The center next door that Whole Foods relocated to was stalled for years because the developers said the only way they would break even if it was mixed use would be if they could go 10 stories high - on the waterfront of the marina. Obviously this was not okay with the community - so the compromise was basically the city buying the land and giving it to the developers so they would only build the retail components. So is the center next door that is getting leveled going to need to be 10 stories too?

There is no way that this retail reuse can be better for the environment than typical growth elsewhere in open areas that are not environmentally sensitive. Makes me wonder how heavily Bezos and others are investing in these unnecessary redevelopments of good productive property.

Worse in Florida which is known as the place for "cities of concrete".

[ClownLoach]

War on retail? That sounds a bit dramatic to me.

It is well documented that the US is overstored, with far more retail space per capita than other countries. In post-Porp 13 California, there is the added issue of "cash box zoning", where cities have historically favored retail over residential because of the sales tax revenue.

With California's severe housing shortage and resulting affordability issues, I think that housing should almost always take priority over retail. If a few shopping centers are lost in the process, so be it. Other retailers will easily be able to handle the increased volume. The majority of stores these days could easily double their annual sales volume with the space and facilities they have.

Based on my experience across multiple big box retailers on the field leadership and real estate side - California almost universally has the worst retail real estate for nearly every chain in operation. Always the smallest back rooms, smaller sales floors, more logistical challenges such as noise curfews and nonstandard docks. The majority of chain retail stores operate their highest volume stores here in California and due to the logistics of having smaller stores with fewer facings requiring significantly more labor to maintain standards they do not leverage well. Look at the grocery chains for example - the average Kroger store is double or triple the size of a California Ralphs store. The Ralphs has to operate on a much more challenging model requiring constant restocking and receiving operations. Big box retail is even worse. The US itself may be overstored - but California is not even close to the national average.

[HCal]

Based on my experience across multiple big box retailers on the field leadership and real estate side - California almost universally has the worst retail real estate for nearly every chain in operation. Always the smallest back rooms, smaller sales floors, more logistical challenges such as noise curfews and nonstandard docks. The majority of chain retail stores operate their highest volume stores here in California and due to the logistics of having smaller stores with fewer facings requiring significantly more labor to maintain standards they do not leverage well. Look at the grocery chains for example - the average Kroger store is double or triple the size of a California Ralphs store. The Ralphs has to operate on a much more challenging model requiring constant restocking and receiving operations. Big box retail is even worse. The US itself may be overstored - but California is not even close to the national average.

Even the busy stores could still probably absorb an increase in volume. I can't remember the last time I went to a Ralphs or Vons that was truly crowded. By number of shoppers, they are probably at less than 50% capacity the vast majority of the time. Given how much sales volume is done by much smaller stores (Trader Joe's is the best example, I'm sure many of their small-size stores do more sales than the average Ralph's) I don't think it would be difficult for existing stores to absorb extra sales. The issue would be staffing and product supply, not physical infrastructure.

[ClownLoach]

Based on my experience across multiple big box retailers on the field leadership and real estate side - California almost universally has the worst retail real estate for nearly every chain in operation. Always the smallest back rooms, smaller sales floors, more logistical challenges such as noise curfews and nonstandard docks. The majority of chain retail stores operate their highest volume stores here in California and due to the logistics of having smaller stores with fewer facings requiring significantly more labor to maintain standards they do not leverage well. Look at the grocery chains for example - the average Kroger store is double or triple the size of a California Ralphs store. The Ralphs has to operate on a much more challenging model requiring constant restocking and receiving operations. Big box retail is even worse. The US itself may be overstored - but California is not even close to the national average.

Even the busy stores could still probably absorb an increase in volume. I can't remember the last time I went to a Ralphs or Vons that was truly crowded. By number of shoppers, they are probably at less than 50% capacity the vast majority of the time. Given how much sales volume is done by much smaller stores (Trader Joe's is the best example, I'm sure many of their small-size stores do more sales than the average Ralph's) I don't think it would be difficult for existing stores to absorb extra sales. The issue would be staffing and product supply, not physical infrastructure.

The issue is the cost of labor. The smaller the building and higher the volume is - the higher the labor is. Without normal stock rooms and facilities the labor is heavily deleveraged. Trader Joe's handles this by staggering deliveries around the clock when they aren't restricted by noise ordinance. But not everyone can do this. The aggravation for most retailers is that the California stores do higher volumes but lower margins.

[buckguy]

California for several years has been trying to impose its will on municipalities to require them to build more housing - and I think it is starting to boil over and will soon become a war on Retail. Retail property that in the past would be redeveloped into newer, more relevant retail is now being rezoned from commercial to residential. This seems to be starting to pick up steam and I have to think it is going to explode in the next few years. The question is - will this turn out to be a disaster down the line? Are they being short sighted and assuming that everyone will shop online and not need stores? Where will everyone shop if these centers are permanently rezoned to residential?

I have some firsthand experience with many of the sites mentioned below - and I can tell you it is exponentially more difficult to get big box mixed use approved versus standalone zoning of either residential or commercial for some reason in California. Basically once any commercial element is involved the environmental reviews are more complicated and structural requirements are more intense. So it is much easier for a developer to just push to tear down a retail center and go 100% residential with maybe a few small suites for a coffee house below but not more than 5% of the space goes commercial again. Although there is always talk about "mixed use" with stores below and homes on top - it only happens in extremely dense urban areas like Downtown LA and not in suburbs because the cost is too high - and usually it's only profitable in a high rise. That is why you see so little of this mixed use outside of the urban core.

Some examples of this in the OC and neighboring LB area unfolding now:

Former Long Beach Whole Foods center "Marina Shores" - this property is less than 20 years old and originally Ralphs wanted to build a flagship store here only to be outbid by Wild Oats so they had to take a tougher location up the road closer to an existing store which wound up consolidating. Sold for $67M and this entire beautiful newer center will be razed to the ground for residential. The older MarketPlace across the street is also for sale and will likely sell for even more to be razed despite having the highest volume Trader Joe's in Long Beach.

Laguna Hills Mall - was going to be a redevelopment project mixed use with offices, lots of retail, theaters, etc. called Five Lagunas. Will now be a complete tear down except for perimeter existing buildings, one small box store will be built (likely a relo of the Nordstrom Rack out to the perimeter) and everything else will be residential.

Shops at Mission Viejo - Macy's is finalizing plans with the City to consolidate into the smaller, newer Men's store building. Macy's women's store and that end of the mall will become residential.

Mission Viejo center on Marguerite - old but surprisingly busy strip mall built in the 60's. Michaels moved out as their facility was obselete and Stein Mart liquidated but everything else is occupied. Redevelopment upgrades have been difficult due to the fact that each building has a different owner but Ralphs, Trader Joe's, Big Lots, CVS, Saddleback Bowl and many small shops and restaurants do fine here. Now this is being discussed as a property that the city will need to eminent domain, level and convert all to residential resulting in the closure of all these stores.

Mission Viejo Vons on Los Alisos - center built before enough residential built up so it underperformed and Vons was dumped on Haggen - now demolished and replaced with housing. Now they need a store there...

Bella Terra in Huntington Beach - this is a busy busy center that was revitalized around 2005 - now they are planning to remove the retail core in the middle of the property and replace it all with apartments. Some of these stores just moved in from other HB area centers. This will result in closing Burlington, Old Navy, Ulta, BB&B, World Market, REI, Kohl's.

Westminster Mall - a dump of a mall that needs remodeling with a bulldozer for sure, current plans show only Target remains and everything else gets leveled for offices, mostly housing, and a Topgolf.

Stanton shopping center - this was boarded up for years at Beach and Garden Grove Blvd awaiting redevelopment - was a closed Ralphs, Savon, and four or five other big boxes. Only about a third was rebuilt as a food hall, three drive throughs and a fitness center - the rest all went to condos.

MainPlace Mall - south end facing I-5 being replaced by residential, just broke ground.

Brea Mall - entire Sears side to be replaced by retail. Large strip mall across Brea Blvd. has demolished all retail East of Target and construction is underway on 6 story apartment complex.

Aliso Viejo Town Center - closed Lowes building, Michaels, Walgreens and Trader Joe's property (former Super Kmart) to be replaced by high rise condos and a hotel.

Once commercial property becomes residential - it doesn't go back. As many of these cities are 100% built out to their boundaries - the loss of this retail space will be irreversible.

What kind of impact is this going to have throughout California as this space is lost?

A lot of your examples are either old centers with limited viability, centers old enough that they can't be depreciated for tax purposes and are probably expensive to maintain or just not exactly new (20 years old in a hot real estate market is "old"). Also, tearing down white elephants for residential is happening all over the country. There simply is a finite number of stores that can fill an old Sears even if the space is split. Property developers are going to respond to the best "value" for their assets and even if they can fill all their storefronts, it might be retail. Only one of your examples involves local government getting involved.

NIMBYs can be a barrier to replacement retail even if housing is part of the mix---that happened to Safeway in two DC locations where they wanted to stay and enlarge. That sort of thing is pretty common in SF. Planned communities often do change the plan because they want to diversify the tax base and even things like greenbelts can be up for grabs. There usually is a process for that---NIMBYism usually is easy to mobilize when zoning changes are proposed, esp. if they change the residential character of an area.

I would be curious what the retail density is in the LA/SD area and if it is far below the US norm (which is double what it is in Canada and 3x what it is in Europe---I'm guessing that its not even close to Canadian levels). My last opportunity to drive in LA was shortly before the pandemic and the big, classic retail strips like Colorado Blvd through Pasadena or the Wilshire and Santa Monica corridors had some vacancies and were much as they were in the past although some areas, like Mid-Wilshire have gotten some new streetside work and new institutional construction. Ironically, a huge area of dense, viable housing was lost with the Park-LeBrea redevelopment. I'm guessing that most of southern California remains overbuilt with retail---there's probably local variation but there is also decades of overbuilding, overall, that needs to be corrected and there are still dead malls, just fewer of them than in a place like Atlanta which has been more obviously over-retailed for decades.

[J-Man]

There is no McDonald's in the entire city of Walnut Creek. The city banned drive thru restaurants in the downtown area.

Ironic. I grew up in Orinda (a few towns west of WC) in the '60s and the very first and ONLY McDonald's in the area opened in ... Walnut Creek! Before that, my high school fast food options were limited to Jack-in-the-Box and Taco Bell in Lafayette.

[veteran+]

Based on my experience across multiple big box retailers on the field leadership and real estate side - California almost universally has the worst retail real estate for nearly every chain in operation. Always the smallest back rooms, smaller sales floors, more logistical challenges such as noise curfews and nonstandard docks. The majority of chain retail stores operate their highest volume stores here in California and due to the logistics of having smaller stores with fewer facings requiring significantly more labor to maintain standards they do not leverage well. Look at the grocery chains for example - the average Kroger store is double or triple the size of a California Ralphs store. The Ralphs has to operate on a much more challenging model requiring constant restocking and receiving operations. Big box retail is even worse. The US itself may be overstored - but California is not even close to the national average.

Even the busy stores could still probably absorb an increase in volume. I can't remember the last time I went to a Ralphs or Vons that was truly crowded. By number of shoppers, they are probably at less than 50% capacity the vast majority of the time. Given how much sales volume is done by much smaller stores (Trader Joe's is the best example, I'm sure many of their small-size stores do more sales than the average Ralph's) I don't think it would be difficult for existing stores to absorb extra sales. The issue would be staffing and product supply, not physical infrastructure.

The issue is the cost of labor. The smaller the building and higher the volume is - the higher the labor is. Without normal stock rooms and facilities the labor is heavily deleveraged. Trader Joe's handles this by staggering deliveries around the clock when they aren't restricted by noise ordinance. But not everyone can do this. The aggravation for most retailers is that the California stores do higher volumes but lower margins.

Yes and no.....................

Total square footage, backroom square footage and sales volume will impact your payroll percentages into red, flat and green zones.

The balance is most exigent. One component will mess it up.

Example: Fresh & Easy purportedly designed their new build stores to profitably operate at $150,000. per week. Of course that volume was not achieved except in some very few stores. Those few stores that went OVER that 150 mark began to seriously struggle in all ways. There were a handful of stores that did over 150 and they were nightmares to operate.

OTOH, stores that were previously supermarkets that F&E occupied, doing over 150 operated without any problems and were profitable.

Side note: Trader Joes system seems to work for them but there is a cost involved that is not quantified or even qualified.

Covid exposed this weakness and for me this is how it impacted my shopping with them. I do not shop there as often because they are out of stock on so many items. Much of what they carry (constantly new and disconinued items) is sourced from overseas. I have not been able to complete my "limited" sku shopping there for quite a while.

So maybe TJs unique and successful small footprint operation is at risk?

[ClownLoach]

Even the busy stores could still probably absorb an increase in volume. I can't remember the last time I went to a Ralphs or Vons that was truly crowded. By number of shoppers, they are probably at less than 50% capacity the vast majority of the time. Given how much sales volume is done by much smaller stores (Trader Joe's is the best example, I'm sure many of their small-size stores do more sales than the average Ralph's) I don't think it would be difficult for existing stores to absorb extra sales. The issue would be staffing and product supply, not physical infrastructure.

The issue is the cost of labor. The smaller the building and higher the volume is - the higher the labor is. Without normal stock rooms and facilities the labor is heavily deleveraged. Trader Joe's handles this by staggering deliveries around the clock when they aren't restricted by noise ordinance. But not everyone can do this. The aggravation for most retailers is that the California stores do higher volumes but lower margins.

Yes and no.....................

Total square footage, backroom square footage and sales volume will impact your payroll percentages into red, flat and green zones.

The balance is most exigent. One component will mess it up.

Example: Fresh & Easy purportedly designed their new build stores to profitably operate at $150,000. per week. Of course that volume was not achieved except in some very few stores. Those few stores that went OVER that 150 mark began to seriously struggle in all ways. There were a handful of stores that did over 150 and they were nightmares to operate.

OTOH, stores that were previously supermarkets that F&E occupied, doing over 150 operated without any problems and were profitable.

Side note: Trader Joes system seems to work for them but there is a cost involved that is not quantified or even qualified.

Covid exposed this weakness and for me this is how it impacted my shopping with them. I do not shop there as often because they are out of stock on so many items. Much of what they carry (constantly new and disconinued items) is sourced from overseas. I have not been able to complete my "limited" sku shopping there for quite a while.

So maybe TJs unique and successful small footprint operation is at risk?

I do think Trader Joe's is struggling right now. Their stores were so crowded and had long lines to get in during the pandemic - so much that I realized that I had stopped shopping there. I used to go about once a week Pre pandemic because they had a store near a unit I managed. Now there are no lines, the stores do have out of stock issues where they are heavily flexing the aisles to cover the holes, and the stores do not seem busy at all with no line at checkout. The flexing is obviously not working and looks ridiculous as half the meat case is lamb chops and ground turkey. In a way a victim of their own success, in another way a victim of the limited occupancy orders last year. Near me there was never a line to walk into the 50,000 Sq ft Ralphs Fresh Fare on the other side of the center, half an hour wait to shop the 10,000 Sq ft Trader Joe's. People are creatures of habit and when something comes along that changes that rhythm it can spell disaster for the business that is in the wrong place at the wrong time. I also haven't heard a TJ radio commercial in a long time, they used to be regular advertisers and could make something like "cookie butter" sound so good in that thirty second spot that you had to immediately turn around and race to their nearest store. In fact I'm not even getting their Fearless Flyer in the mail - I think they're only distributing them inside the stores now.

Their loosely related sister company Aldi also seems to have the same problems and they have really died down. I suspect despite the low price model their private brands are very high margin and of course they spend next to nothing on labor and SG&A expenses having taken mostly problematic properties for low rent so they'll survive. But I haven't seen any new units open and the stores here are dead.

[CalItalian]

The issue is the cost of labor. The smaller the building and higher the volume is - the higher the labor is. Without normal stock rooms and facilities the labor is heavily deleveraged. Trader Joe's handles this by staggering deliveries around the clock when they aren't restricted by noise ordinance. But not everyone can do this. The aggravation for most retailers is that the California stores do higher volumes but lower margins.

Yes and no.....................

Total square footage, backroom square footage and sales volume will impact your payroll percentages into red, flat and green zones.

The balance is most exigent. One component will mess it up.

Example: Fresh & Easy purportedly designed their new build stores to profitably operate at $150,000. per week. Of course that volume was not achieved except in some very few stores. Those few stores that went OVER that 150 mark began to seriously struggle in all ways. There were a handful of stores that did over 150 and they were nightmares to operate.

OTOH, stores that were previously supermarkets that F&E occupied, doing over 150 operated without any problems and were profitable.

Side note: Trader Joes system seems to work for them but there is a cost involved that is not quantified or even qualified.

Covid exposed this weakness and for me this is how it impacted my shopping with them. I do not shop there as often because they are out of stock on so many items. Much of what they carry (constantly new and disconinued items) is sourced from overseas. I have not been able to complete my "limited" sku shopping there for quite a while.

So maybe TJs unique and successful small footprint operation is at risk?

I do think Trader Joe's is struggling right now. Their stores were so crowded and had long lines to get in during the pandemic - so much that I realized that I had stopped shopping there. I used to go about once a week Pre pandemic because they had a store near a unit I managed. Now there are no lines, the stores do have out of stock issues where they are heavily flexing the aisles to cover the holes, and the stores do not seem busy at all with no line at checkout. The flexing is obviously not working and looks ridiculous as half the meat case is lamb chops and ground turkey. In a way a victim of their own success, in another way a victim of the limited occupancy orders last year. Near me there was never a line to walk into the 50,000 Sq ft Ralphs Fresh Fare on the other side of the center, half an hour wait to shop the 10,000 Sq ft Trader Joe's. People are creatures of habit and when something comes along that changes that rhythm it can spell disaster for the business that is in the wrong place at the wrong time. I also haven't heard a TJ radio commercial in a long time, they used to be regular advertisers and could make something like "cookie butter" sound so good in that thirty second spot that you had to immediately turn around and race to their nearest store. In fact I'm not even getting their Fearless Flyer in the mail - I think they're only distributing them inside the stores now.

Their loosely related sister company Aldi also seems to have the same problems and they have really died down. I suspect despite the low price model their private brands are very high margin and of course they spend next to nothing on labor and SG&A expenses having taken mostly problematic properties for low rent so they'll survive. But I haven't seen any new units open and the stores here are dead.

Aldi is very busy in my area. They just opened a new store in Perris last month. It is within a few blocks of Food 4 Less & a Walmart Supercenter. They were crazy busy the two times I have visited.
The Aldi in my city, Menifee, is across the street from a Super Target. It is very busy during the day. I try to shop in the evening only as there are fewer customers. The Lake Elsinore Aldi, which is in a center with a Home Depot, does not seem to have been affected by the Walmart Supercenter relocation this past March across I-15. It's also a very busy Aldi.
The Aldi in Temecula seems to be equally as busy although I don't frequent it very often. Was there Sunday.