North Bay commercial real estate health mirrors boom of e-commerce, delayed office return, retail challenges in pandemic

THE NORTH BAY BUSINESS JOURNAL

March 21, 2022

2 years later: COVID’s impact on the North Bay economy

Sonoma and Solano counties: Different COVID approaches but similar outcomes

Sonoma has been among the California counties with the most proactive public health measures in the past two years, while Solano County has resisted measures.

How has each industry been faring?

Beyond the human toll, the pandemic, public policy responses to it and consumer reactions have had impacts on employers that vary by industry. We talked to players in several sectors, and here’s what they told us.

Voices of local business

Here are the personal stories of how North Bay leaders have steered their organizations through the past two years. What has changed? What were their worst fears, and how did they face them?

The health of commercial property markets in the North Bay depends a lot on what types of businesses live there.

Enclosed malls and shopping centers with a number of tenants deemed “nonessential” and not allowed to open to the public or operate under limitations have struggled. That was on top of challenges retail real estate has been facing in recent years nationally with weakness with certain business models such as department stores.

“The type of tenants that has worked through the problems in past two years came through strong,” said Todd Zapolski, whose Zapolski Real Estate is a partner in the downtown First Street Napa retail and office redevelopment project. “People got out there and found a way to be more relevant to the consumer, whether that was delivery or takeout. That’s built up more clientele for those folks going forward.”

After construction and weather delays, the project started delivering spaces for tenants in earnest as the pandemic emerged in early 2020. The development landed 15 tenants in 2020 and about a half-dozen last year.

And a recent effort at First Street Napa has been to focus on venues that have ample outdoor spaces, a plus for a public hesitant about COVID-19, Zapolski said. The planned opening of musician John Legend’s LVE Lounge at the project this summer is part of that focus. Another feature will be the relocation of Kitchen Door from Oxbow Public Market this spring.

“COVID made people think of experiences out their back door versus going to Hawaii,” Zapolski said.

North Bay office space demand has been complicated by surges and variants of the virus. As companies were planning to start returning to their workspaces last fall, the delta variant wave convinced many to push off those plans, and it happened again at year-end with omicron. While smaller offices are getting activity from companies looking for smaller spaces, satellite offices outside urban centers or startup growth space, properties with larger existing or planned offices are having a tougher go.

Two examples of how the pandemic has shifted corporate space planning are San Rafael’s Autodesk and Amy’s Kitchen in Petaluma. Autodesk has pulled out of office spaces in Marin County and San Francisco as it has seen more interest from its workforce for hybrid work environments, where visits to a physical location are occasional rather than daily. And vegetarian prepared foods maker Amy’s Kitchen has opted out of its plan for a new headquarters to be built at the Riverfront mixed-use project, and it is considering a smaller existing space in the city.

One major North Bay commercial property owner is offering an incentive for companies to bring employees back to the office from remote work. Basin Street Properties through June 30 said it will contribute $1 a square foot into a team building activities fund for new tenants in its office spaces. To be sure, incentives for new tenants such as allowances for tenant improvements or included amenities have long been part of commercial property deal-making, particularly in challenging markets.

"Businesses continue to adapt and look for ways to keep their teams connected," said Scott Stranzl, chief portfolio officer of the Nevada-based company, which has office and retail buildings in Sonoma and Marin counties. "Through the uncertainty we want to support our tenants in their return to work. Whether it's providing our tenants with health and wellness amenities or continuing to refine cleanliness protocols, we want to provide a safe environment that is welcoming and productive. Although behaviors have shifted, we continue to focus on providing exceptional tenant environments that promote their success."

But a darling of North Bay commercial real estate for a few years before the pandemic and accelerating through it has been industrial spaces, particularly distribution warehouses. The rise of e-commerce, propelled by the shelter-at-home public health orders, has heightened demand so much for such logistics spaces that about 2 million square feet is under construction in the North Bay, mostly in Solano and Napa counties. Current and recent projects for e-commerce giant Amazon in Solano, Napa and Sonoma counties have accounted for hundreds of thousands of new square feet.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.