Online shopping, rising retail real estate costs make some North Bay owners look to sell, says expert

John Schaefer has been working the North Bay retail real estate market for 18 years.

In August, he shifted brokerage affiliations, from Cushman & Wakefield to JLL. He and associate Javiera Pierattini are working from the San Rafael office with The Dowling-Bracco Team of industrial real estate agents who handle a number of the large transactions in Napa and Solano counties.

Schaefer had been with the San Francisco-based Terranomics group of retail agents that numbered about 30 at its peak.

And through acquisitions of successor brokerages, he ended up at Cushman & Wakefield. The JLL Bay Area retail team has 10 agents and is looking for more in the Peninsula and South Bay.

Schaefer talked with the Business Journal about the state of North Bay real estate in a time of disruption from e-commerce.

What's the North Bay retail real estate market like now?

JOHN SCHAEFER: Retail overall is healthy right now. Thanks to the economy, it continues to chug along, with limited vacant space available.

We have our eyes on several projects. Northgate Mall (in San Rafael) is being restructured as an asset. Coddingtown (in Santa Rosa) has dropped the “mall,” and we're working with Lois Codding to put together a great tenant mix.

We're excited about Rohnert Station (in Rohnert Park). This is big news for the North Bay to have a project of this type coming and taking the quality of retail to new heights. There is nothing that's mixed use of this scale, with hundreds of housing units and office space at a SMART station.

We're seeing projects like this pop up in high-income semiurban areas like Walnut Creek and Dublin-Pleasanton at BART stations, San Mateo along the Caltrain line and in San Diego downtown. Rohnert Park may be an apples-to-oranges comparison with population density, but such transit-oriented mixed-use space doesn't exist in the North Bay right now.

The owners of Rohnert Station want to get under construction quickly. I think we will see shovels in the ground in the next couple of months.

The new Costco (Wholesale store) is bringing renewed consumer interest to the southern Airport Park area of Ukiah.

Vallejo is seeing continued growth, with the (relatively lower) cost of homes, and it's becoming more acceptable. Ron Gerber is doing good with economic development in bringing in new business, and Mare Island is bringing in new business.

Downtown Napa with the opening of (First Street Napa) center anchored by the Archer hotel continues to attract better retail. People are investing big dollars in downtown now.

Petaluma has the healthiest downtown in the North Bay, with new businesses and the feel of more excitement. It is busy during the day and gets busier at night. Hopefully, Rohnert Park will have that component, with a place for people to meet and spend money on shopping in town.

What's the local retail real estate outlook?

SCHAEFER: A lot of (North Bay retail property) owners are thinking now is a good time to sell. They don't know what the future of retail is for anyone right now. If you plan to sell in the next few years, I think the sooner, the better. We're not sure what the next (economic) cycle has for retail, with online shopping and occupancy costs.

What do you mean by “occupancy costs”?

SCHAEFER: The cost of everything (in retail) is increasing, from food to employment - what is required for tenants in California with minimum wages increasing. The price of goods can only increase so much until (sales) start to decline.

We're seeing better-quality and health-conscious food concepts, but that comes at a cost. They are going to charge more for their products. And again, where will we tap out with what's affordable for the consumer? What can an employee afford to pay for lunch? What used to be $10 to $15 is now $15 to $20. Pricing has gone up 50 to 75 percent for a sit-down lunch, with tax and tip included.

Retailers are getting squeezed, and landlords are still looking at the strong economy and are looking for increases in rent to keep up with inflation. Retailers have reached the maximum threshold of what it costs to do business in the Bay Area. Those costs are getting to a point where net income is lower than one needs to have in place to survive.

There are always new tenants that can come in absorb higher occupancy costs. But the North Bay is the last place (in the Bay Area) new concepts come, so mom-and-pops can't absorb the higher occupancy costs and costs of goods.

The North Bay is a lightly populated area, compared to the rest of the Bay Area. Daytime populations are low. The populations of Sonoma, Napa and Marin counties combined are about 1 million, which is the equivalent of one of the other Bay Area counties.

Retailers consider than when looking in the North Bay, and that's the reason fewer new concepts are coming to the area. The incomes and demographics for the North Bay are huge, but they don't correlate with population density.

I'm referring to standard retail, but retail is ever-changing and we're seeing more service-oriented retail in the market, with medical and urgent care, health and fitness, and other uses that are typically not what you think of as retail food and service.

That's an interesting angle we're still trying to get our arms around. It places into code compliance for a project, like (Americans With Disabilities Act) compliance. Specific to medical, it doesn't always pencil out for landlords to afford to improve properties for these types of tenants.

What kinds of rent adjustments are property owners making to accommodate these costs?

SCHAEFER: You can amortize the improvements over time and get higher rents for the tenants. But sometimes, the upfront costs are higher than even that can accommodate.

Are property owners taking on upfront costs of hundreds of dollars a square foot it takes for medical offices?

We're not looking for a landlord to come up with hundreds of dollars a square foot. Medical offices can call for individual suites, extra plumbing and sprinklers, code-related adjustments for ingress and egress. Municipalities have zoning for those uses, but you don't always have the zoning you need for a property, so you need to go in for a zoning change or seek flexibility. The cost for a zone change for a tenant can be quite high.

What about the recent closure of big-box stores in the area?

SCHAEFER: The main ones have been Toys R Us and Orchard Supply Hardware. The Toys R Us stores are mostly spoken for. The Orchard locations have active negotiations underway for some uses to backfill those spaces. Again, we see this change in retail and the opening of new opportunities, which the North Bay has not had many big-box opportunities.

Most of those spaces are well-positioned and will get attention. The highest and best use for those spaces are health clubs.

There are a lot of boutique fitness concepts in the market right now: Row House out of New York City, Orangetheory, smaller fitness concepts and larger ones. It's a huge category out there. They are looking for 15,000 to 50,000 square feet. Sonoma Fitness is looking to open its second location, in Petaluma in November, and is actively pursuing sites in Marin County.

We're listing the 47,000-square-foot former Mervyn's store location in Santa Rosa Plaza, with a catwalk to the parking garage. It's perfect for fitness or entertainment. Those tend to play into each other and target shoppers owners want at their properties.

-

Jeff Quackenbush covers wine, real estate and construction. Reach him at 707-521-4256 or jquackenbush@busjrnl.com.

Show Comment