WALNUT CREEK, CA—Before the global pandemic that roiled the economy and commercial real estate industry, commercial real estate brokers were noting a growing trend of companies moving out of dense West Coast markets. Faced with rising prices, and lack of office and industrial space, along with the rising cost of housing and business taxes, many small- and middle-market enterprises were under pressure.
The cost of doing business and heightened competition in top markets such as the Bay Area, Silicon Valley and the Los Angeles metro was untenable, and companies began to set their sights on inland markets. The COVID pandemic is projected to accelerate this trend, according to Ed Del Beccaro, executive vice president with TRI Commercial/CORFAC International.
In California's major markets pre-March 2020, vacancies were decreasing in every sector except retail, which had exhibited an overall demand dip regardless of location. At the same time, the affordability and availability of housing in California were making it difficult for working- and middle-class people to find homes. In 2019, Census data showed that more people had moved out of California than had moved in for the seventh year in a row and a University of California Berkeley poll found 71% of people cited high cost of housing as the top reason for wanting to leave the state.
Mid-sized and small businesses such as billing companies, insurance firms, enterprise service companies, and smaller manufacturing and logistics firms couldn't compete with larger employers for space or talent. Those firms needed to relocate where workforces could find lower cost of living and better quality of life.
"Particularly in the Bay Area, our firm has seen companies reach their limits," Del Beccaro tells GlobeSt.com. "Because the Bay Area is constrained due to water, companies have spread out as far as Sacramento 60 miles northeast, creating super-commutes for their employees with travel times exceeding 1.5 hours one way. Business owners are looking beyond the Bay Area where both they and their employees can find better value and have more balanced home life. The COVID crisis also has companies looking at remote working and even leasing satellite locations in the outer suburbs away from downtowns."
In the Western US, smaller companies have increasingly moved into inland states including those in the near west such as Utah, Nevada, Colorado and Arizona. Chief Executive reported that from to 2015, more than 1,800 companies left California.
One beneficiary of the Cal exit is Nevada, where the favorable business climate and growth of companies following a new Google data center in Henderson is causing a new housing boom. MDL Group/CORFAC International, a brokerage based in Las Vegas, recently found flex industrial space for a solar panel company moving from Fontana, CA.
"We expect this trend to continue with similar type energy-related companies because the overall cost of living and cost of doing business within the Southern California market is excessive," said Hayim Mizrachi, president and principal of MDL Group. "Plus, Nevada has an excellent new home market and construction market, which will drive demand for alternative energy sources. Our climate is ideal for solar use and related businesses."
While the full impact of the COVID-19 pandemic is yet to be known, one possible trend brokers are watching is that more businesses will look to spread beyond dense urban centers and coastal cities, which have been harder hit by the virus. Similarly, as remote work becomes more accepted, resulting in changing needs for space and staffing, companies may no longer need to be in expensive coastal cities. The California exodus may accelerate as middle-market firms choose to relocate operations to cities that are friendlier for business and more livable for employees, Del Beccaro says.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
