Midyear Retail Outlook

In the first half of 2013, local home values began increasing and showing solid appreciation over 2012. This trend, combined with lower levels of household debt, should fuel the “wealth effect,” the rise in spending that results from an increase in perceived wealth. Consumers are the main engine of economic growth, and retail sales account for a big part of what they spend. It is our forecast that as the “wealth effect” takes hold in the second half of 2013, we will see sustained increases in consumer spending in 2014. Consumers will begin breaking the “value-oriented” shopping habits they developed during the recession and seek higher-end retail choices.

Santa Barbara experienced a surge of “value” and “discount” retail concepts after the economic downturn in 2008 – Marshall’s, 99 Cent Only Store and H&M are just a few of the examples that set up shop in prime State Street locations. Higher-end retailers are becoming active again, and we expect this trend to continue – although slowly – through the rest of 2013 and into 2014.

For example, Lululemon recently relocated to a higher visibility, larger location at 740 State Street. The clothing retailer is number three in sales per square foot behind Apple and Tiffany. You have to sell a tremendous quantity of high-priced yoga clothing to compete with iPads and diamond rings.
Retail leasing in the first half of 2013 was active with 39 leases signed in Santa Barbara as rental rates remained flat. The current vacancy rate of 2.0% is still one of the lowest in the US.

There are plenty of exciting recent and upcoming concepts in Santa Barbara – many of which are food related, so get ready to eat well. The Santa Barbara Public Market plans to open later this year at the corner of West Victoria at Chapala and will host a collection of retail tenants offering local and regional fine foods. An upscale grocery concept, The Fresh Market, will open in the former Scolari’s building at 222 N. Milpas St. Panera Bread opened its doors at 700 State St, and Los Agaves opened a second restaurant at 2911 De La Vina St to the delight of upper State Street residents.

Also exciting is the recent announcement that Paseo Nuevo is under new management with renowned mall developer Rick Caruso at the helm. We will be closely watching the potential upgrades to tenancies at the mall, and based on the “wealth effect” discussed above, expect to see higher-end tenants joining the mix – both in and around Paseo Nuevo – in the coming years.