Planning beyond the pandemic pause: North Bay retail, office real estate markets reawaken

As restrictions inspired by COVID-19 remain in place, some North Bay business leaders pondering their future real estate needs are having trouble seeing beyond the pandemic.

“People that want to start a business or already have a business and want to expand the business, they just don't have any confidence about when this whole thing's going to be lifted,” said Tom Laugero, a Keegan & Coppin Co. Inc. partner who specializes in Santa Rosa-area retail real estate. “Especially, restaurants, hair salons, nail salons, theaters and health clubs.”

California has changed its approach a few times in reopening business sectors from restrictions put in place in mid-March to slow the spread of the coronavirus.

Retailers and restaurants were able to open for pickup only after a couple of months, and then limited indoor services such as dining had reopenings in some counties such as Napa in June. However, a rise in cases brought a state closure of indoor services in mid-July.

In late August, Sacramento centralized permissions for reopening under a new four-level system based on a different calculation of cases. Napa, Lake and San Francisco were the first Bay Area counties in the red-coded level of “substantial” spread of cases, allowing limited indoor services such as dining, hair salons, and malls. As of Tuesday, only Sonoma, Mendocino and Contra Costa counties remained at the red level in the Greater Bay Area.

Napa agent Cathy D’Angelo Holmes of Coldwell Banker Commercial Brokers of the Valley has seen two types of reactions from local business owners to these public policy changes.

“We're seeing both personality types, and that's those who panic and pull back and those who forward think,” she said. “In the past few weeks, we’ve done a bakery lease and a wine store lease. It’s pretty amazing the businesses that are willing to start a business now.”

But the pickings of retail space in Napa Valley’s largest city remain limited, creating a situation where multiple businesses are vying for available spots, she said.

The vacancy rate for retail space in Napa County was 2.1% of 2.85 million square feet at the mid year point — not counting closures due to pandemic restrictions — the lowest in the North Bay and on the San Francisco Peninsula, according to Cushman & Wakefield. Napa Valley ranked ahead of Marin (3.5% of 5.78 million square feet), Sonoma (4.9% of 10.8 million square feet) and Solano (7.8% of 7.98 million square feet).

One of the biggest improvements for the Marin retail market, the brokerage noted, was the opening of RH’s 60,000-square-foot, three-story flagship showroom with rooftop lounge at The Village at Corte Madera.

Sonoma County’s retail vacancy, by Keegan & Coppin’s estimate, increased by nearly 3 percentage points from the end of last year, reaching 7.2% of 18.6 million square feet at mid year, up from 4.9% in the first quarter and 4.3% at the end of 2019. Big movers in that time frame were a net increase of 125,000 square feet in Petaluma, lifting the vacancy rate there to 9.2% from 3.6%, and net gain of nearly 300,000 square feet in Santa Rosa, bringing the rate up to 7.6% from 3.9%.

One significant new availability in Santa Rosa is the Sears space in Santa Rosa Plaza after a succession of temporary tenants had occupied the space after the store closed in late 2018 amid bankruptcy restructuring, Laugero said.

But challenging some new retail occupancies in the Santa Rosa area are pending building permit applications for new occupants of empty retail spaces, and some of the applications were started this time last year, he said.

Rent deferrals, adding months onto the end of the lease term, have been a more common approach by retail property owners in renegotiations with tenants during the pandemic than waiving rent payments, Laugero said.

In search of smaller, suburban, healthful offices

Under the state’s new reopening system, office spaces for “nonessential” businesses remain closed and can only be reoccupied when the county’s COVID-19 cases have fallen to the “moderate” level, the third-lowest, orange-coded tier.

Only 11 of the 58 California counties had reached that level as of the last state determination on Tuesday, and none of them are in the Bay Area.

Vacancy in Marin office space climbed 110 basis points to 12.4% of 9.9 million square feet in the second quarter, the result of 103,237 square feet of negative net absorption, more space coming on the market than coming off, according to Cushman & Wakefield. In Sonoma County, office vacancy ticked up to 13.0% of 14.8 million square feet, with nearly 87,000 square feet more on the market at mid year from a year before, according to Keegan & Coppin.

For some essential businesses such as law firms, there is an eagerness to come in from remote work to physical offices now, according to Haden Ongaro, who leads Newmark Knight Frank’s North Bay brokerage operations.

“We’re hearing that the whole working from home situation they are productive, but it’s not great for career advancement,” he said. “We’re hearing from junior partners who want to get back to the office and learn from senior partners. They can only do so much on Zoom calls.”

In the last few weeks, companies that had been shopping for Marin offices in early March have picked up their search again, but some space requirements have changed, Ongaro said. In the early months of the lockdown, tenants were doing one-year lease renewals, pushing off decisions into next year.

Some are cutting square footage needs based on fewer people in the office at any given time to limit infection, but others aren’t redesigning office spaces for what they see as short-term measures.

“They’re saying this is something we’ll get through, that we’re not going to build space out on a five-year lease based on COVID,” Ongaro said.

But the surge in companies giving up office space in San Francisco — with more than 5 million square feet of sublease space coming on the market — so far hasn’t reached Marin, he said. But some San Francisco real estate agents and companies are looking to northern suburban office markets to relocate, including recent inquiries from an architecture firm and financial services firm.

“We’re not seeing a lot of absorption, but we’re not seeing our vacancy rate going up significantly,” Ongaro said.

With Bay Area executives buying up homes in outlying areas such as Marin, Napa and Sonoma counties in recent months, the hope is that they will want to bring their companies with them, a historic trend for North Bay office markets, Ongaro said.

Some company principals in San Francisco are looking for hub-and-spoke locations in North Bay counties, with smaller offices in suburban locations corrdinating with a central facility, according to Whitney Strotz, who leads Cushman & Wakefield’s North Bay brokerage business.

Other demand for Marin offices is coming from local business looking to upgrade to higher-class buildings, opting for larger conference rooms but fewer offices to support periodic collaboration among remote workers and looking for modern air-filtration systems or operable windows because of COVID-19 concerns, Strotz said.

“A lot of businesses are making budgeting decisions and are planning for next year, and they want to be in a situation for the foreseeable future that allows them to grow,” Strotz said. “Working at home might be an adequate way to maintain your business, but it may not be conducive for growing your business, coming together for those a-ha moments.”

Big warehouse projects continue to find tenants

The active Napa–Solano industrial real estate market has seen major projects under construction find tenants, helping to keep most of the submarkets stable, even with hundreds of thousands of new square feet becoming available, according to Chris Neeb of JLL’s The Bracco–Dowling Team.

“The market remains tight,” he said. “There is positive activity on projects that going into 2021 we hope will result in more deals.”

He pointed to some examples in the southern Napa Valley industrial areas: Pigman Companies’ Napa Commerce Center’s 152,000-square-foot Building G is nearing completion and prospective tenant activity has been picking up. Stravinski Development’s 330,000-square-foot The Grove warehouse project in American Canyon recently was completed and is half-leased to affiliated company Valley Wine Warehouse.

Possible tenants are looking at the remainder of the 702,000-square-foot building under construction in Napa Logistics Park, after Napa-based Biagi Bros. leased 365,000 square feet of it. And Amazon recently committed to leasing a 202,000-squre-foot delivery station in another building to go under construction in that development this summer.

In Solano County, the 600,000-square-foot phase 2 warehouse at the NorthBay Logistics Center development next to the former Savemart distribution facility in Vacaville is rumored to be in contract with a tenant. At 2121 Ikon Drive in Vacaville, Link Industrial is marketing its 252,000-square-foot warehouse completed six months ago by former owner Dermody Properties, which is building a 70,000-square-foot warehouse in Rohnert Park.

On 26 acres of Talinas Industrial Park near Travis Air Force Base in Fairfield, Phelan is developing a cluster of warehouses and is close to inking a lease for over 200,000 square feet in a new building getting underway this summer, Neeb said.

“Pretty much all of Northern California is performing well for industrial,” he said. “We haven’t slowed down. We’re not red hot, but we have consistent activity.”

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.