Residential and commercial real estate are two different fields in the world of real estate. Although they are distinct, both branches of real estate are influenced by one another. In particular, what happens in a residential area will influence what happens to retail & hospitality in the immediate area. Below are a couple of factors that determine commercial trends in neighborhoods, with real-life examples of cities in California.
1. Large population increases in a community can prompt more demand in retail
Increases in population are directly linked to retail industry growth. If a community sees an increase in population then new retail options will likely appear. According to a report by Mazzone & Associates, the number of stores in an area is correlated with population. This trend is seen particularly in developing master planned communities, where homes and neighborhoods are generally built in stages.
As more people & families move in to these communities, there is a greater need to fulfill the needs of these new households. New grocery stores, pharmacies, “big-box” stores, shopping malls and restaurants will be built to cater to the influx of people that now call the area home. For example, Irvine in Orange County faced a shortage of retail development due to its burgeoning population in the mid-1980s, when it was still a relatively new city. Soon after, plans for 7 shopping centers were developed by the master developer, the Irvine Company. During this process, the first Target opened in the city. In 2015, Irvine was ranked as the 17th best place in the U.S. to start a restaurant. Demand for restaurants in the city is high given its favorable demographics. Among other factors, the study took into account population growth, median income and number of new eateries.
2. Changes in demographics in a residential area can create the need for higher-end stores & restaurants
Changing financial demographics in a residential area can create the demand for higher end retail. Cities or neighborhoods that are seeing people with higher incomes move in prompt luxury retail to replace lower-end stores. In Silicon Valley, the once middle-market Westfield Valley Fair mall opened a luxury area for shoppers last year. New stores include Prada, Louis Vuitton, Tiffany, and Cartier.
Many affluent individuals, particularly those involved in the tech industry, are moving into Santa Clara, the mall’s home base, as well as neighboring cities. Not only does this increase the need for high-end retail, but also increases the number of sophisticated dining options. Previously, the most exciting food in Silicon Valley were in tech companies' cafeterias. Increasingly, more refined restaurants are opening up in the region to cater to tech executives and employees with high disposable incomes.
As we have seen in the examples above, a change in population or income can change a neighborhood’s commercial real estate, bringing in more retail and restaurant options to the area. Moreover, we have seen how residential real estate is intertwined with its commercial cousin, and how they depend on each other for growth.