North Bay retail has little room to grow

DTZ’s preliminary statistics for the first quarter of 2015 indicate that North Bay shopping center vacancy fell over the first three months of the year and now stand at just 3.8 percent, compared with 4.2 percent at the close of 2014.

And assuming that these numbers hold through the remainder of the quarter - it does not end until March 31 - it would mark the second consecutive quarter of falling vacancy levels in the North Bay.

Our survey covers shopping centers in Marin, Napa and Sonoma counties, all of which continue to face significant imbalances between supply and demand. The average asking rent for retail space in the region is currently $22.73 per square foot (psf) on an annual triple-net basis.

This number is up significantly from $19.20 psf a year ago. But we should note that because it covers all sizes and classes of availability, it is useful only as a benchmark. The average asking rate in the region of currently available small shop space (3,000 square feet or less) is $26.05 psf (up from $21.08 a year ago). But this number skyrockets for the rare class A listing that comes to market or for new construction, rental rates for both of which have routinely topped $60.00 psf.

The great challenge facing the market as a whole is that there is not enough available space to sate retailer demand. We are tracking increased space requirements from most retail categories - from food users to hard-goods chains - that are looking to expand in the North Bay to capitalize on the region’s booming economy and the area’s rock-solid consumer demographics. But with a sub-4 percent vacancy rate, little remains in the way of quality space and what little does become available moves quickly. Meanwhile, rents continue to skyrocket.

This is actually resulting in some chains foregoing local expansion and, instead, focusing on growth elsewhere. This shows in the region’s occupancy-growth statistics. We are currently tracking just 83,000 square feet of occupancy growth since the beginning of the year. There simply isn’t anywhere left to grow.

The North Bay recorded 227,000 square feet of occupancy growth in 2014. Sonoma County led the region in terms of growth with 269,000 square feet. Napa County growth was flat, while Marin lost occupancy last year.

So is demand hot in Sonoma, flat in Napa and cold in Marin? Not at all. The 4.4 percent vacancy level we are tracking in Marin consists almost entirely of older product - average age, 45. Napa Valley’s inventory is much more current - average age, 28 - but this market has even tighter vacancy, just 2.2 percent.

Only in Sonoma County are we seeing growth, because only there are we seeing new construction. We are tracking 88,000 square feet of development underway in Sonoma County - all of which is already leased - and an additional 250,000 square feet of shopping center space in planning that will begin construction in 2015.

Meanwhile, two shopping centers currently in the proposal stage for the city of Napa will likely begin construction this summer, adding as much as 200,000 square feet of new product by 2016.

But expect few changes until then. Vacancy levels will remain impossibly tight, rents will continue to climb, and Marin will remain as NIMBY as always.

Garrick Brown is western U.S. vice president at research for DTZ (dtz.com), which has San Rafael and Santa Rosa offices.