5 trends in Silicon Valley retail

Not surprising — more shoppers are turning to e-commerce. What is surprising: Despite the trend, demand for brick-and-mortar retail space is actually increasing.

According to ChainLinks Retail Advisors, retailers plan to open 38,000 new stores nationally in the next year, up from 36,000 stores six months ago. In the last 12 months, retail vacancy has dropped from 9.8 percent to 8.8 percent.

But how retailers are filling that space — and what shopping center developers are providing them — is changing as technology disrupts the industry.

The changes affect everything from the tenant mix of a center (more food) to size (smaller grocers) and what goes on inside (more events and less inventory).

Here’s a look at some of the key changes occurring, according to the experts.

Healthy appetites

According to Chainlinks Retail Advisors, 44 percent of all planned growth this year is from restaurant users. That’s up from 33 percent (or lower) before 2011. The reason is simple: Food is one thing e-commerce can’t make obsolete. And today’s harried consumers are more willing to let someone else do the cooking.

“Food is incredible now,” said Tom Nelson of Colliers International’s San Jose office. “If you have a vacant restaurant space, it’ll lease up right away.”

Curtis Leigh, director of development for Hunter Properties, says food-user demand for Village Oaks, a large retail center he is building in south San Jose, is off the charts.

“If you go back 10 years, we used to have more nonfood uses. Now, a majority is food,” he said.

That has pluses and minuses for landlords: Food users generally pay higher rents, which is good for property owners. But because they also usually demand exclusive rights to their food category, there’s only so much food you can include.

“Once you have everyone in each category, you can start to hit a wall, so it’s a double-edged sword,” Leigh said.

In-store experience

Nonfood retailers aren’t sitting still. They are adding events, classes and entertainment to compete with online. This so-called “experiential” shopping is nothing new; mall owners have long done fashion shows and special events for shoppers. But more retailers are now building their stores around the idea. Bass Pro Shops, which signed a 150,000-square-foot lease at Hunter Properties’ under-construction Almaden Ranch, will have a bowling alley, restaurant and aquarium, Leigh notes.

Thinking delivery

Same- and next-day grocery delivery is still in its infancy. But it has the potential to transform the business, said Garrick Brown, research director for ChainLinks.

“Sooner or later, someone’s going to figure out how to successfully sell groceries online,” he said.

That is one reason why up-and-coming grocers such as Sprouts Farmers Marketand The Fresh Market are seeking smaller stores in the 30,000-square-foot range, compared to the traditional 55,000 square feet a Safeway might take. They are de-emphasizing grocery hard goods and emphasizing fresh produce and meats — items that will be harder for the future delivery services to sell.

“They are thinking a couple of steps down the road,” Brown said.

In-store tech

Randol Mackley, a veteran broker with SRS Real Estate Partners, notices retailers that used to fear technology instead embracing it. He sees a future where customers go to a store to check the color or feel of a product, then configure and place an order from that retailer from their phone.

“The result is you don’t need as much inventory and a lot of the warehousing isn’t necessary,” he said. “It could mean we won’t have as much demand for larger store sizes — like Best Buy and CompUSA used to have.”

Offline tech

Colliers’ Nelson agrees that the online trend is reducing the size of many tenants. But he sees an upside as well: a future where online retail startups transfer into physical space demands.

“I’m getting more calls from people with Internet-based businesses and have reached a point where they need a retail presence,” he said. “You’re going to start seeing more of that. There’s a future where Internet shopping and brick and mortar are fusing.”