By Barbara Morrison, CEO & Founder, TMC Financing
Historically, the Bay Area and particularly the City of Oakland has had deep roots in technology creation and a robust manufacturing sector. The Bay Area is now known for its high priced real estate and steadily increasing rents, and now we have a new factor coming into play, wreaking even more havoc.
The cannabis trade, which is now legal in some form in over half of the U.S., is having a tremendous impact on the commercial real estate market nationwide. That influence is felt particularly strongly in Oakland’s “green zone.” See the map below for an idea of how far the green zone currently extends:
Commercial real estate prices have been rising due to this current trend. This can be seen especially in the light industrial zone, placing pressure on the Oakland-based manufacturers and small business owners. They are facing the threat of being priced out of the neighborhood by cannabis companies. In this post, we answer some crucial questions small business owners facing displacement may have.
Question 1: How fast is the real estate environment changing in Oakland and where is the market heading?
The real estate environment in Oakland is changing rapidly. Have you noticed new marketing popping up on nearly every block in Oakland’s Downtown District? Cannabis businesses are thriving nationwide: the legal cannabis market was worth an estimated $7.2 billion in 2016 and is projected to grow at a compound annual rate of 17%. These companies can afford to pay well over the asking price for a building, and in cash, squeezing out local manufacturers.
Colliers International noted in its report for the last quarter of 2016 on the Oakland industrial real estate market last year that the vacancy rate for the 34 million square feet of industrial space had fallen from an already extremely tight 1.3% to 0.4%. The vacancy rate for warehouse space was not much better at 2.1%. Additionally, it was reported that there is currently zero vacancy in Oakland’s Class A industrial space. Tenants have been driven away either to other markets or to any remaining lower quality spaces.
You can see these trends unfolding in front of your eyes. But to further drive the point home, we asked a market expert about their experiences in the commercial real estate sector. Principal at Lee & Associates, Chris Schofield reported that “the cannabis industry has completely changed the Oakland industrial market landscape. We have seen both lease rates and sale prices double over the past twelve months.”
Question 2: Under current conditions, what are the comparative advantages of buying or constructing a building in Oakland’s industrial district?
The Oakland industrial district is an essential part of the Bay area. Its attractive location meets the needs of a wide variety of manufacturing operations. Stretching from the Oakland Airport to the Port of Oakland and onto the Emeryville border, the Oakland manufacturing belt covers over 5,000 acres of tactically located real estate. It is relatively isolated from the retail parts of the city and adjacent to the busiest port in Northern California and the fifth busiest port in the country.
Due largely to its diverse manufacturing presence, Oakland serves as a regional role model. Although the focus has shifted from heavy to lighter manufacturing over the years, Oakland’s manufacturing sector still remains an economic driver. It includes over 500 companies providing over 10,000 jobs and $10.5 billion in sales. There is no alternative district for Oakland manufacturers, which is why it’s imperative for manufacturers to stabilize their occupancy costs before it’s too late.
Question 3: Will the cannabis industry drastically change the socioeconomic fabric of small businesses in Oakland?
The city of Oakland is attractive to cannabis businesses because it’s one of the few places in California where all stages of production, from cultivation and processing to sales, is permitted. There is no doubt that the cannabis industry will continue to settle into the area, due to the zoning decisions made by the City of Oakland.
The area has already undergone a drastic change in property and rental prices. When a cannabis business or other big business buys a property at a premium, it drives up the prices of the surrounding property and makes real estate in general more scarce.
There are two sides to any industry boom though. Cannabis is eventually going to reach a saturation point both in terms of market and property expansion. The goal is to coexist and help small business ownersstay local and not be driven out by rising prices.
Question 4: What are some of the ways that local businesses can ensure their own prosperity while sharing space with these new competitors?
Small business owners must stabilize their occupancy costs to preserve their future in Oakland. If at the mercy of a landlord, a small business is at risk.What is going on in the local, regional and national economy is important to take into account when operating a small business, as is new legislation that encourages or restricts certain businesses. Rent fluctuations and increased demand for real estate have the potential to break a small business.
The SBA 504 loan is key to small business owners who never thought they could afford to buy a building. The program enables business owners to purchase commercial real estate and equipment, as well as finance construction and renovation costs with affordable terms. The terms of the loan allow the borrower to put down a small down payment of 10% with a low, long-term, fixed interest rate.
Question 5: How can a 504 loan help small business owners keep up with the changing business environment in Oakland and throughout California?
For a small business, moving is difficult and expensive, and can often depreciate the value of equipment. At times, it can even put you out of business. The security of being able to stay local and overcome competition is essential. To stay ahead of the curve, you should consider purchasing commercial real estate for your business. This will provide security, fixed occupancy costs, and, most importantly, a permanent and stable operating location.
Many business owners are unaware that affordable financing is within reach via the SBA 504 Loan Program, which was created to help small business owners stay local, grow, and promote job creation.
Question 6: How is TMC Financing helping small business owners overcome the competition in the commercial real estate market?
Building price tags and monthly rent costs are on the rise, and now more than ever, it is important to achieve financial security and independence. Certified Development Companies (CDCs) help small business owners buy their buildings and enable them to control their future.
For example, our client Chris French Metal utilized TMC Financing and the 504 Loan Program to their success. Chris French came to TMC Financing before finding a building or having enough saved for the down payment. He quickly got a pre-approval letter from us to know where he stands financially and to help bid on a building.
While working with us, Chris started saving up the 10% down payment. With the pre-approval letter in hand, Chris French Metal bid on a 10,000+ square foot industrial warehouse building in West Oakland and beat out nearly 20 other businesses that were interested in it.
Earlier this year, TMC and the City of Oakland held a presentation for local small business owners and manufacturers. The event drove home the fact that many small businesses—particularly manufacturers—are being priced out. The reactions of the small business owners were very telling and reinforced the urgency of the issue. Initially they were shocked to see the influence cannabis is having on Oakland neighborhoods, but then relieved and hopeful when they realized that ownership is within reach. TMC plans to continue educating local small business owners on the cannabis industry, the commercial real estate market, and the effect those two factors can and will have on their business.
As a member of the Oakland community and a longtime advocate of small business owners, TMC strives to help small businesses stabilize their occupancy costs and stay in the neighborhoods they helped establish. If you have a business in the Oakland industrial zone and want to learn more about buying commercial real estate, please contact a 504-loan expert at TMC for more information.
About TMC Financing
Barbara Morrison, a local small business advocate and civic leader, founded TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. The Small Business Administration 504 loan program allows small business owners to finance commercial real estate and other fixed assets with long-term, below-market, fixed interest rates. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States.