North Bay retailers seek second-generation real estate to survive, thrive

The pending expansion of the Marin County Puerto Rican restaurant Sol Food into an already outfitted space left vacant by the Sauced BBQ & Spirits spot in the Theatre Square live-shop complex in Petaluma could be a sign of what’s to come for empty retail real estate in the months to come.

Retail and office vacancies are less in the North Bay than in San Francisco, and when the spaces become available, they may be repurposed by entrepreneurs looking for inexpensive plug-and-play expansion sites, according to longtime experts in local real estate markets.

Deborah Perry of Colliers International has seen interest from sellers of vehicles.

“Some of these dealerships I can see opening in big-box stores,” she said. “I think that could happen in Santa Rosa for electric cars.”

While some scouting the Bay Area for locations are Vietnam startup VinFast and Sweden’s Volvo Cars, she said, the retail real estate in general is looking to be slow through 2021.

Matt Holmes, president of Retail West Inc., which mostly represents tenants but also lists properties, develops real estate and runs shops, calls the current retail environment “small ball wins.”

“The general retail environment belongs to the entrepreneur, it belongs to the creative boutique,” Holmes said. “It's no longer chain-dominated. The chains are failing faster than you can count. Innovation starts at the street level. Innovative retailers curry more favor than a big chain, because the big chains, although they may sign leases with great balance sheets and financials, fall down hard. It's like a redwood tree falling in the forest; it takes down everything with it. Even though you think you've got security, you really don't.”

He said smaller merchants are eager to capitalize on the rise of “push cart urbanism” — plugging small-scale concepts into small spaces or farmer’s markets initially. These innovators are seeing spaces open up and a flood of newly unemployed retail workers because of the pandemic and failed stores.

And more shuttered restaurants because of the coronavirus pandemic restrictions will bring an abundance of second-generation space to the market, attracting the remaining active players more so than newly built space, Holmes predicts. That’s because it can add another $200–$300 a square foot for the restaurant-specific features such as Americans With Disabilities Act requirements for restrooms, ventilation and other systems.

But small local retailers aren’t the only ones looking for vacant existing space for their next move, according to Annie Prupas of CBRE.

“Most activity I’m seeing in the North Bay on new deals are strategic relocations, because national retailers are concerned about spending capital,” she said.

Prupas has been working with one unnamed tenant on a Marin County relocation from two levels of a mall to one for a prototype of the chain’s new direction.

“If it is a high-performing store and with increased spaces coming on the market with bankruptcies or closings because of COVID, these retailers are willing to justify the (capital expenditure) because they are well-performing stores. Easier paths to getting approved by real estate committees are relocations.”

But the biggest challenge in retail real estate for most of this year is the uncertainty from the pandemic shutdowns of “nonessential” retail activity and then the wildfires, Prupas said. Smaller retail centers with tenants not deemed “essential” such as grocery have been seeing spaces come back on the market as independent retailers shut down and some of them move out of the Bay Area, she said.

“All the economics of a deal are based on sales expectations,” Prupas said. “The reason why deals are not done yet is because they are just now getting a few months of sales to know what sales may be going to be. But projecting for the next year or two until vaccines are fully available makes those projections more difficult.”

Larger spaces in Santa Rosa’s eponymous southern retail corridor left vacant by defunct or contracting chains are in active negotiations for new tenants, according to Tom Laugero, a partner of Keegan & Coppin Co. Inc./Oncor International.

Among them are nearly 32,000-square-foot former Office Depot store in the Costco Wholesale-anchored Santa Rosa Marketplace Shopping Center, a 10,500-square-foot former Pier 1 Imports store just to the south and a long shuttered 38,000-square-foot Toys R Us toy store nearby.

“Good real estate is good real estate, even in bad times,” said Laugero, who has been working in Sonoma County retail estate for 35 years.

As the Business Journal reported, a Planet Fitness franchisee purchased that former toy store and plans to open a club there late next year. Prupas was a listing agent in that deal.

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.