Santa Barbara’s downtown core shopping district is in trouble. Santa Barbara is not alone; it is a microcosm of the retail world right now.
A lot of attention has been focused on the large number of vacant retail stores here. The Downtown Organization, a group dedicated to promoting the interests of its business members, has commissioned a study of the problem. They are concerned about the “exodus” of retailers.
I took an inventory of retail store vacancies in the core State Street area of our downtown. It included the Funk Zone up to the 1300 block of State Street and the side streets close to State Street that you would be willing to walk to from State.
I counted 30 stores listed for rent of which 23 were on State Street. My data sources included listings by our local commercial real estate brokers as well as Loopnet, the largest source of commercial property listings. The total available space is 134,541 sf. That is a lot of vacant space. I remember counting vacancies on State Street during the height of the Great Recession (around 2011) and I think I counted about 18 vacancies.
I did not include the development around the Hotel California at the foot of State since it isn’t open yet (you can pre-lease though). But that’s another 8,000 sf. It also doesn’t include the soon-to-be-vacant Macy’s which is the largest space in downtown (141,000 sf), which, if it isn’t available right now, it certainly is something Macy’s wants to sell or rent out.
Since all the economic indicators are in the green right now indicating a growing economy, something else is going on to cause 30 empty stores.
This isn’t a local phenomenon just affecting Santa Barbara. The same factors are affecting all retailers; it’s a national trend.
Chain Store Woes
Large chain stores are undergoing massive store closings. Macy’s is closing 100 stores. JC Penney is closing 140 stores. Sears/Kmart is closing 150 locations. It’s happening to other chain retailers located here (or used to be here): Abercrombie & Fitch – 60; The Limited – 250; Wet Seal – 171; American Apparel – 110; Aeropostale – 154; American Eagle – 150; Chico’s – 120; Men’s Wearhouse/Jos A. Banks – 250. Some of these stores have already departed Santa Barbara. Some are in bankruptcy.
Mall owners are putting a brave face on all this saying that they can “reposition” their malls to bring in new retailers to take up the slack. But, apparently, investors don’t buy that. Mall REITs (stock-traded companies that own malls) have been hammered by short sellers. A year and a half ago Macy’s stock was trading at $72. Last week it was at $30.
But, what about Santa Barbara? What about all those local retailers and restaurants lining State Street? Aren’t we different? Sorry, but we are not immune to national trends. The same factors that affect the national retailers are affecting local retailers.
Here are three fundamental changes to retailing that are causing empty stores:
The Internet is challenging brick-and-mortar retailers nationally and worldwide. This is not news and it is not going to stop. Last Christmas retail sales nationally were up only 2.5% from last year, but sales at brick-and-mortar chain stores fell 10%. However, online sales increased 11%, with Amazon getting 38% of online sales. This is the future. If you can buy it on Amazon, why drive downtown?
There is just too much retail space in the U.S. There are 23.5 square feet of retail space per person in America. In Canada, the next highest, it is 11.1 sf per person. While the U.S. is the biggest consumer economy in the world, the fact is that we have massively over-built retail space. Even the Fed has been warning of a commercial real estate bubble.
Is that true for Santa Barbara? After all, we aren’t building any new commercial space in downtown Santa Barbara.
One would have to be blind to not see the same trend here. Things change. Otherwise why would we have 30 retail vacancies? There are just too many vacant stores in downtown Santa Barbara for any quick solutions.
Economics and Demographics
There are several long-term trends affecting consumer spending in America.
In the three-year period from 2014 to 2017, inflation-adjusted disposable income grew less than 5%. On the other hand, household debt, or what families owe, is back to where it was pre-Crash, at about $12.5 trillion. So much for deleveraging. Families are loaded with debt and disposable income is flat. As a result, retail sales (inflation-adjusted) have grown a total of only 8.4% in the past 3 years. This is not a sign of a booming economy.
Add to that the fact that big-spending Baby Boomers are entering their dotage and are spending less. That is important because they, as the wealthiest segment of the population, were the big spenders. Since incomes and spending rises and falls with age (ages 40 to 60 are the spending sweet spot), the aging of Boomers and the rise of a less wealthy generation, the Gen Xers loaded with debt, will result in a less rosy future for retailers.
Things are going to continue to change on State Street. These trends are beyond something we can “fix”. The reality is that we have 134,541 sf of retail space available downtown in a strong economy. If you add in the Hotel California projects that’s another 8,000 sf. That’s too much space for Santa Barbara to easily absorb.
I’m not saying people are going to stop shopping on State Street; locals and tourists will come, but there will be fewer of them. But retailers must offer products that can’t be easily bought cheaper online. It’s easy to say that the problem is that rents are too high. And they are, but they are not the sole cause of the problem.
Property owners are going to have tougher times leasing their properties. Rents will fall and perhaps, even in high-priced Santa Barbara, values will fall. The market will decide how much.
Retailers will need to be more entrepreneurial to survive. I have a lot of faith in entrepreneurs. Santa Barbara attracts creative people; it is a petri dish of innovative retailers trying to create retail magic. They are the ones who will be the future of State Street. If property owners and the Ci cut them some slack, State Street will survive and thrive.