11 Comments | PrintBig investors, small startups vie for bargains ascommercial real estate market stirsBy Hudson Sangree and Phillip Reesehsangree@sacbee.comPublished: Wednesday, Jan. 2, 2013 - 12:00 am | Page 1ALast Modified: Wednesday, Jan. 2, 2013 - 12:24 pmSacramentos long-depressed housing market started ticking up early last year. Now thecommercial real estate market, which has suffered from plunging rents and soaringvacancies, is stirring as well.As with housing, players in the nascent revival range from large institutional investorsattracted by low purchase prices to the business equivalent of first-time homebuyers –startup shopkeepers drawn by affordable rents.Last month, Westcore Properties of San Diegoand DRA Advisors, a New York-basedinvestment firm with billions of dollars in real estate holdings, wagered $600 million on avast collection of warehouses and office buildings assembled by the late Sacramentodeveloper Joe Benvenuti. Their assumption: Rents andproperty values will rise in comingyears.Its the second-largest commercial real estate transaction in Sacramento history, and itechoes similar institutional interest in Sacramento housing, with big firms such asBlackstone, based in New York, snatching up hundreds of rental houses here.Westcore president and CEO Don Ankeny said his company has faith in Sacramentoscommercial real estate market and sensed an opportunity to boost the performance ofBenvenutis portfolio."A little new blood coming to the table can put energy into it," he said.The weak commercial real estate market has created bargains for tenants as well as buyers.In recent months, some businesses have taken advantage of lowered costs and high vacancyrates to open shop or expand, including in former industrial spaces where rents are rockbottom.
"Were finally, after about five years, starting to see vacancy rates drop in industrial andretail space," said Sally Hamilton, a professor at Drexel Universitys LeBow College ofBusiness in Sacramento.Right now, she said, there is "a lot of movement and opportunities."Whole Foods moved into the former Borders bookstore in Davis, while a competitor, FreshMarket, has set up shop in a former Borders in Roseville and plans to occupy one on FairOaks Boulevard in Sacramento.Another newcomer to the area, the Sprouts grocery store chain, has occupied oldsupermarkets inLand Park and elsewhere.Revitalization and change are also bubbling up on a more micro scale, with homegrownentrepreneurs seeking opportunities for rental bargains.Take Track 7 Brewing, a small business that celebrated its one-year anniversary this weekand is preparing to double its space.The brewery, which has a retail taproom, occupies a roll-up garage along the railroadtracks in an industrial area south of Sacramento City College, on West Pacific Avenue.It attracts a devoted crowd of beer fans, who sit at picnic tables under patio heaters andbright lights, drinking ales and eating from the food trucks parked outside.The two young couples who own the brewery roll up the garage door on the days theyreopen for business."This is the property that had the lowest cost per square foot" of any properties the ownerslooked at, said Ryan Graham, the main brewer and one of the four owners.There are 10 units in the warehouse-style building, which also houses an auto body shop. Anumber of the units fell vacant during the recession, but after Track 7 opened, a bike shop, adance troupe and a cross-fit gym also arrived, Graham said.The brewery pays about 50 cents a square foot for the 2,200-square-foot unit – a little morethan the going rate of 30 cents to 40 cents a square foot for warehouse space in the region.
Its now bumping into an adjoining unit. In between brewing beer, Graham has been busyrebuilding the bathrooms.When the brewery rented the space in 2011, the landlord at the time, Chris Brocchini,offered months of free rent and upgrades, including gas and water lines, Graham said.That was at a time when the building was more than half empty."In the bottom of the recession, he was very motivated to help us out here," the brewer said.Brocchini, whose former business partners have since taken over the building, owns similarsites around town, where changing fortunes have led to new tenants.They include a former paint store on S Street where Revolution Wines and Temple Coffeenow operate, and a one-time typewriter repair shop on P Street occupied by a pet-washingbusiness, Splash Hound USA.The recession and other changes put some tenants out of business and created openings fornew ones, Brocchini said."Its a business cycle," he said. "Some things work for a while and they dont work anymore.Certainly now the entry cost is much lower because the rents are lower and everything costsless."How long low rents and high vacancies will persist depends on whom you ask. And itdepends if youre talking about the retail and industrial sectors, which show some signs ofimproving, or office space, which is still struggling.Scott Kingston, vice president with Ethan Conrad Properties, said the commercial realestate market typically lags about a year to 18 months behind the residential real estatemarket.That means the commercial market wont significantly improve until later this year. Fornow, he said, "Commercials not getting better. Its just not getting any worse."Garrick Brown, director of research for Terranomics, expressed skepticism about any quickimprovement in Sacramentos commercial real estate market. Rent increases in the BayArea could lead to companies moving here, but not for some time, he said.