As of the close of 2012, North Bay shopping center vacancy was just 4.9 percent. While up from the 4.7 percent at the end of the third quarter, it still is one of the Bay Area’s lowest vacancy rates. Strangely, the North Bay’s low vacancy rate -- not the economy -- is the biggest challenge to North Bay retail property.
Local vacancy before the downturn hadn’t climbed above 5.0 percent in 2004-2007. It began to creep upward following the near financial collapse of 2008 but still peaked at just 6.3 percent by 2009. Certainly, this posed challenges to local landlords -- but nothing compared to those we saw nationally.
U.S. shopping center vacancy climbed from the 7 percent range to nearly 13 percent at the same time. Since 2009, retail realty has been in slow recovery. Growth increasingly is driven by a mix of discount and dollar stores, smaller-format grocery and -- most strongly -- restaurants, particularly fast-food and a slew of new fast-casual players.
Throughout the recovery, retailer demand has been driven by a search for “the sure thing,” or sites that offer high population density and above-average incomes in markets where local economies -- and employment growth -- are surpassing national averages. Thanks to the Bay Area’s surging tech-driven economy, our region has emerged as one of the top U.S. retail growth markets in both retailer demand and declining vacancy.
Yet the North Bay faces increasingly rare available quality retail space. Many retailers that would, otherwise, open stores in Marin, Napa or Sonoma counties, find few options.
We track 18.8 million square feet of North Bay shopping center space, so 4.9 percent vacancy is about 900,000 square feet. The overwhelming majority of this vacancy is in the region’s class C shopping centers, while most of the space requirements we are seeing are for class A or B-plus space.
North Bay retail growth is starting to be stunted by a lack of quality product. Much of this is directly related to the difficulty of developing new commercial real estate projects of any type in the region. The average age of North Bay centers is 33 years.
The average age in Marin, arguably the most difficult for development locally, is 43 years. That drops to 32 years in Sonoma County and 24 years in Napa County. Some recent projects in American Canyon have helped to skew this number downward, but there is a shortage of quality retail space available in the region.
Property age is directly related to overall retail center vacancy rates: 3.7 percent in Marin, 5.4 percent in Sonoma and 5.3 percent in Napa Valley.
All these trade areas face the same problem. Vacancy is almost nonexistent -- with few exceptions -- in the best centers. This has had a significant impact on local shopping center rental rates.
The good news is a number of pending new projects -- mostly in Sonoma County -- will help improve those numbers.
Merlone Geier’s Deer Creek Village project in Petaluma will be delivered in phases starting later this year and will eventually add as much as 315,000 square feet of retail and office space. Likewise, Regency Center’s Target-and Safeway-anchored East Washington Place regional center will add another 240,000 square feet of space to the market later this year.
Lastly, the Graton Resort and Casino project in Rohnert Park will add more local options for the extremely hot restaurant market. As many as 13 dining spots are set for the property, ranging from a steakhouse to coffee bar.
All these projects will boost growth in local retail occupancy, jobs and the tax base. That said, difficult development hurdles of many North Bay communities will continue to be a challenge. For example, East Washington Place took seven years for entitlements and lawsuit settlement, and Petaluma is one of the region’s more development-friendly communities.
Until this is addressed, the North Bay will continue to lose out on economic growth. For high-end retail space in the North Bay, the real estate cliche “if you build it, they will come” is actually true -- one of the few places in the U.S. where it is.
