Commercial vacancy is high

As people tighten their belts in the economic downturn, some of the first businesses to go are the small retail shops that depend on customers’ discretionary income. The economic conditions have led to a high commercial vacancy rate around town, changing the game for both landlords and tenants. For the first time in years, landlords are negotiating rent to keep from losing struggling tenants, and tenants are taking a second look when their lease is up because they now have more options on the market.
The vacancies are primarily caused by small retail businesses closing, not by downsizing. Essential businesses like grocery stores, service and repair shops seem to be holding their own.
“Dollar stores are doing great,” said Isaac Raboy, commercial real estate broker at Orion Partners.
There are a number of vacancies on Broadway, as well as at shopping centers like Maxwell Village and Fiesta Plaza. Raboy said the market may be slow now, but things will eventually get better. “This too shall pass,” he said. “We have been through times that at the time we could not even imagine our way out of. People just need to lower their expectations.”
The Sonoma Valley is doing nominally better than some other areas of the county because the city is closer to San Francisco and is still a popular destination.
“Sonoma’s a little bit protected. It’s not downtown San Francisco,” said Ryan Snow, a broker with NAI BT Commercial.
He represents the Sonoma Court Shops, which currently has 42,000 square feet vacant, more than usual, a combination of ground-floor retail, second-floor office and second-floor live-work spaces.
Several brokers said landlords have had the upper hand for the past several years, when space was tight. Now they have to readjust as tenants deal with lagging sales. Some landlords are negotiating to keep tenants from going out.
“It’s a great time for tenants to renegotiate renewals and take advantage of this,” said Snow.
Jim Hanson, the owner of Sonoma Rentals, said he’s considering a move when his lease is up later this year. Since spinning off the party rentals business, they don’t need as much space, he said. He’s looking in the Eighth Street area. Also, Workforce Boots, which had subleased from them, decided to close its Sonoma branch near the end of 2008. Their primary store in Petaluma is close enough to serve Sonoma Valley.
Some of the relocations are directly related to the downturn in the real estate market.
The Washington Mutual home loan center on Broadway opened when volume was so high the bank couldn’t handle it. It was closed in June, along with loan centers across the country, when the bank decided to move those services back into their regular branches.
Morgan Lane, right across from City Hall, is moving into a smaller space further down Broadway that used to house a pet grooming business. Jill Silvas, who heads up the office, was one of the few people working in the building on a recent weekday. She said most of the 15 or so agents are so rarely at their desks that it didn’t make sense to rent such a large space.
Paul Harris, owner of Imagine Sonoma, a landscape architecture firm, recently moved out of his offices on Broadway. He’s teamed up with a former classmate from graduate school, who also had his own firm, to reduce overhead. He knows two other self-employed professionals that have scaled back their offices as well.
“The market has to get real, quick,” said Ned Forrest, an architect who owns a building on Broadway. His offices are upstairs and he rents out the downstairs.
One of his tenants, Bella Yarns, was struggling in the down economy. He negotiated the rent to try and keep them in the space, but they couldn’t make it. “People ought to ask, to negotiate,” he said.
Most brokers said investors are still wary and not overly confident for 2009. “Right now is a good time to look at small commercial properties with good financing and stable tenants,” said Raboy. He was heartened by a report he saw showing that short-term lending to large companies has shot up – an indication that confidence is growing after being decimated several months ago.
The confidence of real estate investors is still low, however, according to a survey conducted by Marcus & Millichap Real Estate Investment Services. Of the respondents, 51 percent said they planned to increase their investment this year, compared to 60 percent who said that in 2007. Their top concern, by far, was the availability of financing. Few expected it to improve quickly, with 40 percent saying it would be harder to obtain debt financing in a year and just 23 percent saying would be easier.