COMMERCIAL REAL ESTATE: Shopping for Commercial Space Picks Up

Tightening market in Southern Marin County harbinger of coming trend

BY JEFF QUACKENBUSH
STAFF REPORTER

NORTH BAY – Southern Marin is showing signs of a cyclical wave of business expansion building along the Highway 101 corridor. Vacancy rates are below 10 percent for office space, and rents of $4 a square foot per month are back.

Office vacancy rate estimates for southern Marin at the end of last year were 6.3 percent and 7.1 percent, according to commercial real estate brokerages NAI BT Commercial and Orion Partners, respectively. A year before, the brokerages estimated vacancy there was 11.1 percent and 14.2 percent.

Vacancy of 10 percent often is a milestone for when a tenant's market becomes a landlord's market in which property owners can raise rents and make fewer lease concessions.

Asking rents were just more than $3 a square foot per month at the end of 2005 in southern Marin and are nearing $4 so far this year, according to Orion President and CEO Bill McCubbin. He notes that increasing rents and dipping vacancies in southern Marin historically spread northward as San Francisco office space becomes scarce and Marin companies expand.

"In Marin and Sonoma counties we saw more than 1 million square feet of leases signed last year and some positive absorption," he said. "That's a very strong indication of reduced vacancies and higher rental rates to come."

That kind of activity – plus a relative lack of new construction – convinced Equity Office Properties Trust and Hines to invest about $380 million in 2.16 million square feet of North Bay office space since last June.

Marin in line with North Bay

However, the move of George Lucas' companies from 180,000 square feet in San Rafael to San Francisco increased San Rafael's fourth-quarter vacancy to 13.6 percent from 9.6 percent a quarter before. But that vacancy shift masks the situation for the average North Bay tenant, according to NAI BT Managing Partner Greg Moss.

"If you need 2,500 to 5,000 square feet, your experience in the North Bay market is that it is relatively tight and landlords have strength in negotiations," Mr. Moss said. "The bulk of the space on the market is not appropriate for 5,000-square-foot tenants."

Also not represented in the vacancy figures is the building investment market that continues to attract owner-user and investor buyers. That trend is expected to continue for at least the next six months as interest rates rise.

Santa Rosa rents up, despite vacancy

For Sonoma County, fourth-quarter office and industrial vacancy rates were 21 percent and 6.9 percent, respectively, according to Al Coppin, president of commercial real estate brokerage Keegan & Coppin. Office vacancy countywide remained above 20 percent all last year and jumped from 17.2 percent in late 2004 because of the 500,000-plus-square-feet of former Agilent Technologies space in Rohnert Park, 72,000 square feet Alcatel wants to sublease in Petaluma and a few new speculative office buildings in Santa Rosa.

Contrastingly, industrial vacancy tightened from 10.7 percent in late 2004 because increasing land prices and materials costs have hampered construction of speculative industrial space. That will loosen some in Petaluma, where industrial vacancy was 9 percent at yearend, in the first quarter of this year as toymaker Russ Berrie closes its 233,000-square-foot distribution warehouse.

However, the cost of replacing North Bay commercial real estate has climbed so much in the past few years that Santa Rosa area average full-service office asking rents that haven't crested $2 a square foot in the past five years are now getting takers at $2.15 to $2.25, despite the overall vacancy rate, Mr. Coppin noted.

Napa land prices soaring

In the business parks south of Napa, 2006 begins with a dwindling long-term inventory of industrial space. Only 10 percent of the 10.5 million square feet of industrial space and 11.4 percent of the 2.1 million square feet of office space was vacant at the end of last year, according to Keegan & Coppin estimates. That doesn't count the 157,000-square-foot former EDS data center at 2600 Napa Valley Corporate Drive, deemed too specialized for most tenants.

However, Panattoni Development Co. is erecting the first of twin 150,000-square-foot high-cube warehouses, called Napa Valley Crossroads, for the former Hakusan sake winery near the intersection of Jamieson Canyon Road and Highway 29. The first warehouse is set for completion by April.

Across Highway 29, Pacific Union sold 50 acres of land in six parcels last year to Canada-based Ledcor Development and Napa-based Zapolski & Rudd, growing wine negotiant Don Sebastiani & Sons and two land investors, according to Keegan & Coppin's Randy Wood, who is marketing the property.

In early January, Pacific Union put the last 50 acres of the 386-acre business park on the market and already has a developer interested in all six parcels, a winery attracted to one parcel and a beverage company interested in another, according to Mr. Wood.

Demand has sent land prices soaring from $6.50 a square foot in early 2005 to $9 at the end of last year and to $10 for the last 7.38 acres in the park along Highway 29. Demand drivers were Pacific Union's ending its exclusive speculative building contract with Petaluma-based Basin Street Properties a year ago and the planned Montalcino Resort & Spa set to start construction at the north end of the business park in March, Mr. Wood noted.

"When you run out of land, there is an increased sense of urgency," he said.

The County of Napa is taking stock of what industrial land is left in the county as part of its update to its central land-planning document. Key to that is the 152-acre Napa Pipe Corp. facility between the Napa River and the business parks.