Talk about money: Commercial real estate too easy to come by

Jim Reed was driving through Silicon Valley recently when the source of Scotts Valley’s commercial real estate woes came clearly into focus.
The outgoing Scotts Valley mayor saw stretches of a half-dozen or more new office buildings along Interstate 880 with space for rent. One advertised a rate of 50 cents a square foot — and that the tenant would get their logo on the building.
When Silicon Valley has commercial real estate rates that low, and a talent pool regarded as more desirable, it is “challenging” for Scotts Valley to keep and attract employers, Reed said.
The result: Seagate Technology is moving over the hill this spring from its longtime home on Disc Drive in Scotts Valley.
Another major employer, Virtual Instruments, which started in the old Borland building, has moved its nearly 100 employees to a new facility near the San Jose airport.
In addition, Aviza Technology is shutting down its facility behind Skypark.
Scotts Valley is being left with a lot of vacant commercial space. Incoming Mayor Dene Bustichi said in a recent Press-Banner commentary that Scotts Valley has more than 1.1 million square feet of unoccupied commercial buildings and a vacancy rate of 33 percent — the largest in the city’s history. Three years ago, the vacancy rate was about 15 percent, Bustichi said.
It’s a depressing situation in a still-depressed global economy. But Reed points out that the immediate financial impact isn’t as large as one might think, because very few of those companies produce any significant sales tax revenue.
Scotts Valley gets about $40 per employee from business license revenue, so that’s not a large revenue producer for the city.
The major worry is what it will mean for local businesses. When high-paying jobs leave the city, fewer dollars are spent at local restaurants, dry cleaners and stores, resulting in lower sales-tax revenue for the city.
Business owners are pushing city leaders to do whatever they can to attract employers to Scotts Valley to replace the jobs that have been lost.
Reed sees reasons for optimism. A lot of smaller technology companies in Scotts Valley are weathering the economic storm and are positioned to grow rapidly when conditions improve. He said one local company just closed a “good-sized chunk of venture funding.”
He hears from commercial real estate people in Scotts Valley and over the hill that they’re seeing signs of improvement they hadn’t seen for at least a year and a half.
And Bustichi points out that city has attracted Easton-Bell Helmets, with 140 high-paying jobs, and helped Zero Motorcycles stay in Scotts Valley and expand.
Both the outgoing and incoming mayors look for improvement in 2011.
As Reed puts it: “The fundamentals of Scotts Valley are as strong as they’ve ever been — a highly educated workforce, an unmatched quality of life built around our natural beauty, and a small-town sense of community that’s rarely found any place anymore.”
Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 831-439-9910 or [email protected].