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Santa Rosa's Montgomery Village offers example of challenges facing retail property owners

For 70 years, Montgomery Village in Santa Rosa has weathered many U.S. retail sector trends, from the population flight to the suburbs, to the era of big-box stores and the advent of e-commerce.

But the coronavirus pandemic that ushered in the mid-March temporary closure of most county businesses presents an unprecedented challenge for the 300,000-square-foot outdoor shopping center central to the lives of many Santa Rosans. Many shop at the variety of boutique stores, eat at the local restaurants and attend its summer concert series.

Many of the 70 stores have been temporarily shut. A few merchants partly reopened Friday taking advantage of county health officials green light for certain retailers to conduct sales curbside and by delivery. Other tenants like Cattlemens steakhouse and Acre Coffee have been offering carryout food and a caffeine fix.

However, there already have been virus-related casualties like Buddies Fun Clothes For Her and Cleaners 2000 laundry service.

Montgomery Village owners David and Melissa Codding are now trying to do everything in their power to prevent any more stores from departing. The retail center’s actions to keep tenants from collapsing offers a microcosm of the stiff challenge facing commercial property owners across Sonoma County. The Coddings and other retail landlords are forced to consider and offer rent decreases and deferrals, in an effort to buy time - and hope - that county health officials soon will allow retailers to again welcome shoppers into stores. There’s no definitive date for that to occur here or statewide.

“Our tenants are like a family. We treat them like family. We want to help them as much as possible to succeed. When they do well, we do well,” Melissa Codding said.

Regaining something resembling success will be a tall order for most of the retail sector that was in the middle of an ongoing loss of in-store sales before COVID-19 gripped the United States. The growing online shopping trend that has ramped up the past few years is compounded in the Bay Area with the high cost of living, which has particularly hurt retail employees, who typically earn lower salaries.

The research firm Coresight predicted 15,000 stores could close in America this year, which would surpass the 9,548 closings in 2019. On Thursday, luxury retailer Neiman Marcus filed for Chapter 11 bankruptcy, following the path of J. Crew and Pier 1. In recent years, Sears, a longtime national retail stalwart fell on hard times and finally closed its landmark Santa Rosa Plaza store.

Upon reopening after the coronavirus coma, retailers will face new social distancing and other public health protocols that will require more employee training and the uncertainty of how quickly consumers will return. The historic spike in job losses is expected to translate into less spending, and therefore declining revenue for most retailers.

“A lot of retailers, they were trouble before this happened. This is going to kill some retailers,” said Thomas Laugero, a partner at Keegan and Coppin, which has been in commercial real estate sales and leasing here for decades and has retail customers at the Santa Rosa Marketplace.

For example, a big question before the pandemic had been the fate of two Macy’s department stores in Santa Rosa after the parent company announced in February it would be closing 125 stores nationwide over the next three years. Laugero wondered whether it would be feasible to have the Santa Rosa Plaza and Coddingtown Mall stores both remain open 2 miles apart.

The downtown shopping mall has only one retail anchor left, Macy’s.

“And will they have that in the near future? I don’t know,” he said.

The ramifications of the fallout the coronavirus pandemic presents for the retail industry go beyond the employees, many of whom now are furloughed, the shoppers who can’t afford to buy more the basics and the ability to renegotiate store leases. The sector is critical to the local economy, and it’s lackluster performance will have ripple effects.

Retail provides needed sales and property taxes to help fund state and local governments. In fiscal 2019, the city of Santa Rosa levied $22.4 million in sales tax revenue. The shopping and dining also are the heart downtown development districts, whether longtime ones like the Healdsburg Plaza, burgeoning types such as the Windsor Town Green or still-unfinished redevelopment of Santa Rosa’s Old Courthouse Square.

“It’s unchartered territory for everybody,” Laugero said of the next stage of retail business in the age of the coronavirus.

Montgomery Village has a few advantages over rivals. It’s managed to keep its vacancy rate low with none at the end of 2019, according to Keegan and Coppin data, compared with Santa Rosa Plaza’s 8% vacancy rate and Rohnert Park’s Wal-Mart Plaza at 13%. Overall, Sonoma County’s retail vacancy rate was 4.7%, at the end of last year, of 18.5 million square feet of space. During the Great Recession in the fall of 2009, the county’s retail vacancy rate jumped to 9.2% of available space. Commercial real estate experts expect a higher volume of retailers to vacate their shops as a result of the pandemic.

“It’s the breadth and the depth of this and that’s what gives the concern about vacancy rate,” said Paul Schwartz, a senior sales associate for the commercial division at Terra Firma Global Partners in Santa Rosa.

The Coddings also have financial advantages over competitors. They operate Montgomery Village under little debt with a manageable $9 million loan from Exchange Bank on the books. In contrast, Simon Property Group - a publicly traded national retail property company that owns the Santa Rosa Plaza, Petaluma Village Premium Outlets and Napa Premium Outlets - extended on March 16 its $4 billion credit line along with another $2 billion option. The latter’s debt-to-equity ratio has risen significantly over the past four years.

“We don’t like to have a lot of debt on our property,” said David Codding, whose father Hugh started the Santa Rosa retail center amid a former orchard, which was later annexed into the city.

That’s not the only difference between the two retailing rivals in Santa Rosa.

“Our leases are a little bit different than traditional large (real estate investment trusts) like Simon. They have to charge a very high minimum rent to get certain returns on their investment,” Codding said.

Montgomery Village charges tenants a minimum fee amount along with 5% to 8% of a store’s monthly sales. They are working with their tenants to restructure leases, whether deferred payments to be paid later this year or in 2021 or reducing the rents, David Codding said. Each tenant is different, though he didn’t go into specifics.

Sonoma Outfitters, a family owned sporting goods store in Montgomery Village, secured a U.S. Small Business Administration loan through the Paycheck Protection Program that allowed owner Debra Knick to bring back some employees for curbside sales and an eventual full store reopening.

“David Codding has been totally understanding in working with us,” Knick said, noting she’s glad to be working with a local landlord rather than a large national retail property company.

Acre Coffee of Petaluma started to-go service on April 17 at its Montgomery Village site. Owner Steve Decosse said the Coddings worked with him to ensure continued viability at the Santa Rosa shopping center. Acre Coffee has reopened three of its six locations for pickup so far, in addition to its pizza shop in The Barlow in Sebastopol.

Securing lease renegotiations with tenants has allowed the Coddings to start planning for what an eventual reopening of their shopping center may look like when in-store dining and shopping resumes.

“If we can get on the other side of this, which I think we can, our independent merchants know we will be supporting them along the way,” Melissa Codding said.

She would like to get the traditional summer concert series restarted by late summer, though with smaller crowds that would be spread out for proper physical distancing and monitored by security.

“I’m not throwing in the towel just yet,” she said of the annual concert series.

The couple also are buoyed they have an outdoor shopping complex that can provide more seating outside for restaurant tenants when county and state officials permit the restart of in-person dining.

“We want everybody to be open as soon as we possible,” David Codding said. “We want to push the envelope ... as much as we can possibly can and stay legal.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com.

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