March 04, 2005

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Publication Date: Friday, March 04, 2005

Retail demand offsetting record-high office vacancies

Record high office vacancy rates are continuing to drive rents lower throughout Pleasanton while demand for retail space is soaring, two business specialists have reported.

The two, who addressed the Economic Development Committee of the Pleasanton Chamber of Commerce, are James Paxson, General Manager of the Hacienda (Business Park) Owners Association, and Pamela Ott, the city's Economic Development manager.

They said the office vacancy rate for Hacienda and similar business parks are in the 12 percent range and 17 percent citywide. Even so, that's less than being reported in other cities, including Livermore, which has a more than 30 percent vacancy rate.

"It's off the charts," Ott said.

Paxson agreed, saying the office market has simply disappeared.

"There's no market for offices right now," Paxson said. "I mean there's none; it's completely nonexistent."

Along with the high vacancy rates, property owners are cutting rents.

"Back in peak years, we had less than a 1 percent vacancy rate in Hacienda," Paxson said. "If you were a small tenant and you had to be in Pleasanton, you were paying $4 a square foot in full service rent. Today comparable office space is going for $1.85, and some space is being leased at only $1.65."

Although there's some encouragement with recent tenant leases, the glory days of the dot.com economic boom have yet to come back to Pleasanton. Employment peaked in Hacienda in 2000 with about 22,500 employees. Total employment there now is about 17,000, a 20 percent drop in just five years. The recent loss of about 600 jobs as a result of the acquisition of PeopleSoft by Oracle Corp. added to the drop, Paxson said, but the worst has been the loss of more than 4,000 jobs at AT&T, which moved or sold off most of its business units.

"That was particularly significant for Pleasanton because as a percentage of the workforce, many more lived here than those who lost their jobs at PeopleSoft," he said.

They were employees who had worked at AT&T for years, earned good salaries, were married and owned homes in Pleasanton and had children in the school system. When they lost their jobs, it had a major impact on all parts of the city's economy and infrastructure.

Ott and Paxson said it's too early to assess the economic damage from the PeopleSoft layoffs, which they said were much less than expected.

"Stores like Wal-Mart, which have regional draw, probably didn't feel the impact as much as the smaller restaurants and service businesses, which have very small profit margins to start with," he said. "Any workforce reductions that affect their businesses have a huge impact."

Paxson said that although the office market is dead, retail space is at a premium.

"Where we once had retail vacancies in the 8 to 12 percent range, there's less than a 1 percent availability today with absolutely unbelievable pent-up demand," he said. "We just finished a retail study that showed we could build any type of retail facilities in Hacienda, alone, and they would be fabulously successful."

He cited the newly redeveloped Metro 580 center at Owens and Rosewood drives, home to Wal-Mart and Border's bookstore and where Kohl's Department Store and Sports Chalet opened new retail centers last fall.

"Wal-Mart just keeps energizing itself and growing," Paxson said, "and Kohl's, Sports Chalet and Borders are enjoying very high levels of patronage. Everyone is pleased, including the strip stores on the other side of the shopping center that are also benefiting from all the traffic."

Concerns over adding more traffic to already-congested Pleasanton streets are all that are holding back the push to add more stores in Hacienda, which now has 890,000 square feet of retail development. That's still small compared to 5.4 million square feet of office space in Hacienda and 1.7 million square feet of research and development facilities. In addition, 1,540 people now reside in Hacienda townhomes and apartments. That number could increase if corporate owners are successful in gaining city approval of requests to rezone adjacent vacant properties that they own to build more housing.

Paxson said that although the market is bleak for office building growth, there has been some movement by companies already here to expand their space. Safeway Corp. recently leased two of the long-empty Schwab buildings along I-680, and Ross Stores moved its headquarters into the CarrAmerica properties on Rosewood Drive from Union City last year.

"Another trend we're seeing is what we call 'Flight to Quality,'" Paxson said. "With a large amount of Class A office space now available and rents moving down, a lot of smaller businesses are moving up. People who have been working out of their homes are deciding it's now affordable to make the leap to office space, which they can lease for as little as $1.50 a square foot in Hacienda. This is a huge opportunity for small businesses wanting premium space."

Competing against high vacancy rates throughout the Bay Area, Pleasanton still offers special advantages that brought Hacienda Business Park here in the first place.

"Businesses large and small want all of the good things this community has to offer in terms of quality of life, good schools, an available educated workforce and good access to major freeways," Paxson said. "With the entire Bay Area to look at and a wide assortment of available space, there are many points for business people to look for. We see a lot of small companies and startups looking at space here. That's exciting and bodes well for our future."

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