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2005 Marin Office Market Analysis and Predictions © Brian Eisberg, Principal, Orion Partners Ltd. March 8, 2005 For the Business Journal annual Commercial Real Estate Outlook: Musical chairs, anyone? The 2004 year-end vacancy rate for office space in the Marin County market stood at 17.2%, which represented a small 0.5% decrease from the year end 2003 rate of 17.7%. However, there was actually a story behind what might look like “Trading Places” to the casual observer. The county-wide vacancy rate for Class A space decreased significantly from 21.5% to 18.6% and the county-wide Class B office space vacancy increased from 11.2% to 14.8%. The market moved significantly from significant negative net absorption of 63,600 square feet for 2003 to modest positive abosoption of 7,150 square feet for Calendar Year 2004. This not only indicates an improving market, but indicates a flight to quality that is helping Class A buildings at the expense of Class B properties. Part of the reason for that is the narrowing of asking price differentials between the two market segments, making first class space not much more expensive and therefore more worthwhile to office tenants. The other part of that is genuine optimism by Marin County employers and the wish to be in office space that enhances their image and provides more amenities for their employees and their customers.
One negative factor in the market in 2004 was the continuing addition of sublease space. Sublease space rose from 357,000 square feet at the end of 2003 to 430,000 square feet at year-end 2004. Once again, big companies continue to leave Marin County and dump more space onto the market. The good news is that despite this, small and medium size firms continue to absorb even more space than the big firms put on the market. Hopefully, the imminent departure of the Lucas Family of Companies to San Francisco will mark the last significant major employer retreat from Marin County. As a broad indicator of the economy’s bounce back, office rental rate asking prices actually increased slightly over the past year for the first time since the dot –com bubble, although they still remain 25% less than that artificial peak, and good deals remain, although “great” deals have largely dried-up. Now how about 2005? The first quarter is almost over.
With rents stabilizing and even going back up slightly and Marin County’s broad based economic recovery now very well underway, tenants are jumping back in the market. There are now countless negotiations with small, medium, and large tenants underway in the commercial real estate community, much to the reassurance of our office-building landlords.
The biggest consumers of space continue to be concentrated in health care, business service and financial services sectors, although we are seeing adolescent software firms starting to gain ground as well, something we haven’t witnessed in quite a while. All cities throughout Marin from Sausalito through Novato are now decidedly more business friendly. Another relatively new phenomenon that began in 2003, strengthened in 2004, and is going to continue in 2005 is the purchase of office buildings and office condominiums by tenants who can now, with current low interest rates and attractive SBA financing, make sense out of buying office buildings rather than continuing to lease buildings. Orion Partners Ltd. brokered a high volume of professional and medical office condo sales in 2004 and we are looking forward to more of the same in 2005. Spec office development has ground to a complete halt, which has also helped the market recover. There is one possible new development that will break ground in San Rafael this year of approximately 115,000 square feet in two buildings, and a couple office condominium projects may be constructed. Now is the time to make a good deal on office space, either through lease or purchase, if you need more or better space, or less space and your lease is almost up. All asking rents are soft, although less soft than last year. There are still $3.00 to $3.50 deals being signed in Sausalito, Corte Madera, and Greenbrae, with rates between $2.50 and $3.00 in Mill Valley, Larkspur and $2.20 and $2.50 for first class space in San Rafael and Novato. As always, the closer to the Golden Gate Bridge you are, the more you will pay for your office space, and the further towards Petaluma you get, the less you will have to pay. Marin County office buildings continue to sell briskly as long-term investors are not worried about this market. In fact, we receive more institutional investment every year in Marin County. Marin County is viewed as a “safe-haven” and investors accept a lower return on their investment here than almost anywhere else in the United States. Investment sales have never been more brisk and new price levels are being constantly achieved. Marin County, which has an entrepreneurial nature hardly matched anywhere in the United States, continues to see start up, adolescent, and mature companies requiring new employees and more space. And the employment trend continues to be from south to north, with firms tending to start up in Southern Marin and tending to move north for their employees’ benefit, as they get larger. Unfortunately, some of Marin County’s largest firms will be leaving space (and relocating jobs) in the next couple years, including the Lucas Family of Companies, Autodesk, and Fair Isaac. My predictions for 2004 turned out to be right on the money, so here are my predictions for 2005:
If you have an office or R&D space requirement anywhere in Marin or Sonoma County, give me a call. We’ll sort this market out together and get your firm a good deal. Contact: Brian Eisberg Principal
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