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Modesto offices need renters

jnsbranti@modbee.com

A glimpse of which businesses and stores are moving in, what's moving around and what's staying away was offered by commercial real estate brokers at a recent Modesto economic conference.

They shared statistics on the Northern San Joaquin Valley's relatively high vacancy rate for office buildings and its booming retail market.

While new Target, Lowe's, Kohl's and Home Depot stores are helping fill many of the region's shopping centers, the brokers said more than 500,000 square feet of Modesto office space sits empty.

Speaking at the Valley Real Estate and Economics Conference were Duke Leffler, president of PMZ Commercial Real Estate, Tom Solomon and Tim Bettencourt, partners in CoSol Real Estate, and Brian Velthoen, president of Velthoen Associates Commercial Broker.

Here are highlights of what they said:

Office vacancies: About 19 percent of the office space in and around Modesto is sitting empty. So is 20 percent of the offices in Stockton.

"Over the years, the office market has been the weakest sector of real estate in this region," Leffler said.

There are many vacant spaces throughout downtown Modesto and along major streets such as Coffee Road, Leffler said. He said few large white-collar employers are interested in moving to the region.

"We are not a regional headquarters for anything, except for maybe Save Mart," Leffler said. Often when employers fill new Modesto office space, he said, they're simply moving from across town, which leaves vacancies elsewhere.

He said filling older downtown Modesto offices is particularly difficult because there isn't enough parking.

"Modesto isn't like San Francisco where people are willing to walk five blocks to get to their car," Leffler said. "Here people want to park right in front of their office."

To accommodate that desire, PMZ is building two office complexes — each 15,000 square feet — in the Scenic Oaks Professional Park on Scenic Drive in Modesto.

But generating enough rent to justify new office construction is tough, Leffler said. He estimated that new general-purpose offices cost $273per square foot to build. That requires they be leased for at least $1.82 per square foot per month to generate an acceptable rate of return.

Most of Modesto's older offices, however, rent on average for $1.61 per square foot per month.

Retail stores: Large national chains are filling most of the region's new shopping centers, but it's tough for locally owned startup shops to afford them, Tom Solomon said.

He said rent, utilities and other property costs for a typical 2,500-square-foot retail store are about $10,000 per month. For a prudent business, such occupancy costs shouldn't consume more than 7percent of a store's gross income.

"So the store needs to do almost $2million in sales per year to make it work," Solomon said.

That's tough to do for small shops.

"You have to really scrutinize what you're doing, know your demographics, understand your trade area, determine who your customer is going to be and do your homework," Solomon cautioned. "You've got to be a little bit fearless, too."

Because many small startup shops aren't successful, Solomon said new shopping centers are reluctant to lease to them.

There are plenty of chain retailers getting leases, however, especially big companies such as Target, Lowe's, Kohl's and Home Depot.

In California's Central Valley, Tim Bettencourt estimated there are five to seven new Target stores for every one Wal-Mart built.

"Target has really passed them up," he said.

High-end shops: Fancy clothing and specialty stores remain reluctant to move to the region, according to Brian Velthoen.

Retailers such as Pottery Barn, William Sonoma and Brooks Brothers "still are taking a wait-and-see approach to the Central Valley. It's a difficult sell to get them here."

Many communities want high-end retailers such as Nordstrom, Velthoen said, but such companies are very choosy about where they build.

"You have no idea how sophisticated these stores are in their selection process," Velthoen said. Since most shoppers use credit cards, he said retailers can track their customers' ZIP codes and spending habits. "They know where their customers live and how much they earn."

But it takes more than high-income residents to attract such stores. These retailers also try to determine if their merchandise is a good fit for an area.

In trying to lure Nordstrom to Manteca's Promenade Shops at Orchard Valley, Velthoen said, he took store executives on a tour of the area.

"They were looking for their customers," said Velthoen, adding that these executives took note of what the shoppers they saw were wearing.

"They did not see enough polo shirts," he added.

Stores such as Nordstrom also insist city governments and shopping center developers help them cover millions of dollars in upfront construction costs, Velthoen said.

Many communities are willing to do that, he said, because such stores attract so many shoppers who boost sales tax revenues.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

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