Sonoma County restaurants, real estate developers reveal challenges for local economic growth

‘These are challenging times for the restaurant industry,' says the CEO of Mary's Pizza Shack. In commercial real estate, a big challenge is shrinking supply of space businesses are hot to get.|

Two major drivers of the Sonoma County economy are real estate and retail, and two of the largest companies in those industries say they need to get more creative as pressure on resources grows.

Propelling the gross county product — the area's economic output — are real estate (17.5 percent), manufacturing (15.3 percent), government (10.1 percent), professional/business services (9.3 percent), health care (9.2 percent) and retail trade (7.6 percent), according to the most recent figures from the U.S. Bureau of Economic Analysis.

One of county's largest private employers in retail is Mary's Pizza Shack. As it enters its 58th year in business, it is adjusting to increasing pressures on the family-owned chain's bottom line on several fronts, said Vincent Albano, CEO and grandson of founder Mary Fazio.

Revenue growth was flat for the company last year, and he's budgeting for something similar this year until there's more clarity in how things are headed. And the heavy rains so far this year aren't helping first-quarter restaurant traffic, he said.

'These are challenging times for the restaurant industry,' he said.

He identified four factors taking significant slices out of Mary's profits. Grocery stores are more aggressively wooing consumers to get prepared meals there. Fast-casual restaurants are growing quickly, stressing smaller guest check totals and quicker turnaround on orders. California labor laws are increasing costs at a time when sales growth is tepid at best and taking menu price increases is a delicate undertaking. And consumer carbohydrate consciousness continues to grow, a concern for a menu known for pizza and pasta.

'SIGNIFICANT IMPACT'

The Sonoma-based company ranked No. 15 among the county's largest private-sector employers last year, with 300. Counting all its nearly dozen-and-a-half locations, mostly in Sonoma and Solano counties, Mary's employs roughly 800.

Like other restaurateurs, minimum wage increases are a 'significant impact,' Albano said. Every $1-an-hour wage increase costs Mary's $600,000 a year.

California's Fair Wage Act of 2016 raised the state's minimum wage to $10.50 per hour from $10 on Jan. 1 for those that employ more than 26. Smaller businesses have to raise the minimum to that level by 2018. The 26-plus wage floor rises incrementally to $15 per hour by 2022.

'I'm not opposed to minimum wage,' Albano said. 'Tipped positions are making well over $15 an hour shouldn't be part of it.'

Until that changes in California, some local restaurant owners are considering legally allowed alternatives. One being kicked around is adding a tip to the guest check total, asking patrons not to leave an extra tip then distributing the tip to all employees. Because of legal challenges to similar approaches in recent years, it would have to be developed cautiously.

But Mary's isn't going in that direction, Albano said.

'Who wants to be the first at that?' he asked.

Grocery stores nationwide have been ramping up their selection of prepared meals and even remodeling to build in pubs as well as eateries — nicknamed 'grocerants.' Mary's has been combating that revenue leakage by not only offering its whole menu for takeout or delivery but also increasing its catering business. By opening up its banquet room for corporate or group events with catered food, a restaurant can serve 15 or more people at a time with demands on servers.

'We are benefiting from lower food costs, like grocery stores are, but we have minimum wage cost increases that groceries are already paying,' Albano said, referring to the mandated minimum now including servers. 'First, we were hit with health care [coverage mandates], then came sick days and then minimum wage.'

But the growth in fast-casual restaurants or installations of diner-style counters in traditional restaurants, is cutting into Mary's tradition of table service, Albano said.

'We're trying to figure out how to afford that server, because that's our culture,' he said.

One way the company is making an inroad into fast-casual is by a brand extension. It's first Slice Shack opened last year on the north side of Sonoma Plaza, near an existing restaurant. It offers top-your-own large slices for $4.50–$5.50 that get finish-baked in 3 minutes. Also offered are meatballs or pasta in a breadbowl.

NEED FOR BUSINESS PARKS

In real estate, the North Bay's largest commercial real estate brokerage is Keegan & Coppin Co. Inc./ONCOR International, based in Santa Rosa with offices in Sonoma, Marin and Napa counties.

'Breweries and the wine industry are expanding, and medical device companies are to some degree, and they need flex space — not office space,' said Al Coppin, president. 'You do not attract industry then find space available to put them. They come looking at space that's available to occupy or build then decide to locate here.'

Industrial space vacancy in Sonoma County has plateaued at a level nearly half of what's often considered to be a healthy proportion of space available. At the end of last year, the county's overall vacancy rate was 5.8 percent of 24.4 million square feet tracked by Keegan & Coppin.

NEW INDUSTRIAL OPPORTUNITIES

Warehouses are the expected target for two commercial-land sales last year north of Santa Rosa totaling about 50 acres. They were purchased by local developers.

On Aug. 31, Airport Business Center purchased 24 acres of land at 1631 Airport Blvd., near the entrance to Charles M. Schulz–Sonoma County Airport. The seller was SeaStack Enterprises LLC, which had been holding on the property for a decade and a half and secured a tentative map from the county for development of industrial space.

'We just needed some more inventory,' said Larry Wasem, managing member of Airport Business Center. The Santa Rosa-based real estate investor has been has been developing more than 360 acres of commercial land east of the airport for decades. 'We have a number of deals in the works.'

The developer is talking to a few tenants that are looking for 30,000 to 150,000 square feet of warehouse space.

'If someone wanted something bigger than 150,000 square feet, it would be hard to figure out where to put them that's zoned [for it],' Wasem said.

Also just east of the airport, 22 acres along Copperhill Parkway between Westwind and North Laughlin boulevards were sold to Billa Enterprises LLC. It's part of the 84-acre master-planned Westwind Business Park, where Brondi Development has been rolling out buildings in for the past two decades.

The property had been considered by Russian River Brewing for a 50,000-square-foot production facility, before the Santa Rosa company ultimately decided to ink a deal for a plant, now under construction, with Airport Business Center nearby in Windsor. There's also a 30,000-square-foot industrial user wanting to open a facility in that Windsor development.

'There's lots of interest, but no signed leases to be announced,' said Ajaib Bhadare, who leads Billa.

He's planning to build a 48,000-square-foot building on the Copperhill property to have something ready for prospective tenants.

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers construction, commercial real estate and wine.

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