EQUITY OFFICE SEES BRIGHT FUTURE IN COUNTY: REAL ESTATE BET: CHICAGO-BASED COMPANY'S EXPANSIVE PORTFOLIO SHOWS BULLISH EXPECTATIONS ON MARKET GROWTH

BYLINE:    KEVIN McCALLUM 

One year after making the biggest real estate bet in Sonoma County history, Equity Office Properties Trust is having an unusual case of buyer's remorse -- it wishes it bought even more.

The largest commercial real estate company in the United States remains pleased with its $263 million purchase of some of Sonoma County's landmark office buildings and is more bullish than ever about the market's future.

``We're delighted to be a larger presence in Sonoma County,'' said Mark Geisreiter, senior vice president of Equity's Northern California region.

Last July, the Chicago-based company announced it was acquiring a large chunk of the real estate portfolio of Petaluma-based Basin Street Properties -- a total of 37 office buildings in Sonoma and Marin counties.

The deal included well-known Sonoma County buildings such as the Redwood Business Park in Petaluma, which housed many of the telecom startup companies that fueled the region's tech boom in the '80 and '90s.

All told, 1.43 million square feet of office space changed hands, leaving the Equity Office with a 40 percent share of the Class A office market in Marin and a 33 percent share in Sonoma.

The company's footprint in Sonoma County soared from 161,000 square feet to nearly 1.3 million, an eightfold increase that catapulted the company from a bit player to a powerhouse overnight.

Well, not exactly overnight.

The complex transaction took months to accomplish, and the final building in Santa Rosa's Fountaingrove Executive Center, which was still under construction last year, didn't change hands until February.

The net effect is that dozens of Sonoma County businesses employing thousands of workers today have a different landlord than they did this time last year.

The prospect of such sweeping change created trepidation among tenants who didn't know what the future might hold for them.

``Whenever a building is sold, the old relationship is gone and you get this whole new relationship. It's like an arranged marriage, and you don't know how it's going to turn out,'' said Mike Wagner, real estate manager for the County of Sonoma, which has more than 230 employees in buildings that changed owners.

Some tenants were concerned that instead of dealing with a locally owned and locally focused company, they would soon be dealing with an out-of-the-area landlord.

Equity Office is the nation's largest real estate investment trust, with $25 billion in assets. It is publicly traded on the New York Stock Exchange and is headquartered in a 26-story art deco tower overlooking the Chicago River.

Soon after the sale, Equity Office made several changes. It replaced most property managers and maintenance staff with its own people. It also took over the Petaluma headquarters of Basin Street, which moved into new digs in its $100 million Theater District redevelopment project.

The new owners also met with every tenant to discuss their concerns or ideas about the properties, said Matt Krupp, director of leasing for Sonoma County. They followed that up with a host of improvements to the properties, Krupp said.

The company immediately made safety improvements at the Parkpoint Business Center on North Dutton Avenue, removing hedges in the parking lot to improve visibility, said Betsey Harper, senior staffing specialist with human resources firm Manpower.

``It seems like a little thing, but you think about safety when it's dark out,'' Harper said.

Equity Office also did a complete review of the interior of the buildings, replacing things like old toilet seats. They also have responded to routine cleaning requests, like cigarette butts accumulating outside doorways, Harper said.

``I've been really happy with the changes,'' she said. ``They're really responsive.''

Krupp said the company's average response time for minor service calls like new light bulbs is ``something like 17 minutes.''

Not that Basin Street wasn't responsive, Wagner said.

``We were very happy with Basin Street, and we are very happy with Equity Office. We're continuing to get good customer service,'' Wagner said.

Equity Office is obsessed with customer service because it makes good business sense, Geisreiter said. Retaining existing tenants is crucial to maximizing returns in the real estate management industry because recruiting new tenants is expensive, he said.

That's one of the key reasons the company found Sonoma County so attractive.

Marin County's office space market is incredibly tight and very expensive, and companies often are forced to look north for more room to grow, Krupp said. Without larger properties in Sonoma to place its Marin clients, the company faced -- and had been -- losing them to competitors, Krupp said.

So when Equity Office grabbed such a large chunk of the Sonoma County market, Krupp knew the company had made a good move and left his previous employer -- Orion Partners -- to join the firm.

Equity Office prefers markets where it can be the market leader and where the barriers to entry are high, Krupp said. The Sonoma County market is unlikely to be saturated with new office space anytime soon because of tight development restrictions, he said.

``For us to build 1.5 million square feet of office space in Sonoma County would have taken us 15 years, if we could have done it at all,'' Krupp said.

The developer that built much of that space, Basin Street, is now using the proceeds of the sale to pay its investors and diversify its portfolio, which had become too concentrated in the Sonoma office market, said President Matt White.

``We were literally tied to one small, local economy and that just is not a good business move,'' he said.

The company has added hotels and parking garages to its portfolio, and has moved into other markets such as the Central Valley and Reno, White said.

``I think the Reno market has less risk and more legs to run on than Sonoma County does today in the office market,'' White said.

Equity Office, meanwhile, thinks it can use its strong relationships with brokers to achieve better than average occupancy rates than than the competition.

The buildings it purchased, such as Waterfall Towers on Bennett Valley Road, came with an average occupancy of 90 percent, and now the company is working hard to fill up the remaining 10 percent.

The company has special programs to help businesses get up and running quickly and to lure tenants into ``challenged spaces,'' Krupp said.

Equity Office's investment remains a testament to the resiliency of the Sonoma County office market, said Bill McCubbin, president and CEO of Orion Partners. He predicts the company will continue to satisfy existing tenants and lure new ones to the area.

``They are consummate professionals in this field,'' McCubbin said.