Office vacancy is off to a tough start

NORTH BAY – The mythological character Sisyphus was destined to roll a heavy stone up a hill repeatedly only to watch it speedily return to the bottom. Similarly, recently released figures on North Bay commercial real estate activity show how hard-negotiated leases for space vacated in the last recession can be offset quickly by large properties returning to the market.

Office vacancy rates had been falling steadily in Sonoma and Marin counties for more than a year. The countywide rate for Marin dipped to its lowest level since 2001, according to Bill McCubbin, president and CEO of commercial real estate brokerage Orion Partners. His brokerage estimates 15.6% of the space larger than 10,000sf was vacant in the first quarter of this year, compared with 19.1% vacant a year before.

Contrastingly, the latest quarter saw Sonoma County reach its highest vacancy rate since 2001 because of Agilent Technologies' former Rohnert Park campus debuting on the market following its sale to Codding Enterprises, according to Orion's figures.

The county's vacancy rate slipped to 14.7% at the end of last year with brisk leasing activity recently in Santa Rosa and near Sonoma County Airport. But in the first quarter, the Sonoma County vacancy rate shot up to 20.4%, with class A office vacancy of nearly 30%. Orion opted to include the Agilent space in its vacancy estimates for the quarter, because the space was set to be available for lease in three months. Had it not done so, the countywide office vacancy would have slipped to 14.3%, Mr. McCubbin points out.

 

Bad news, good news

A large amount of space set to return to the Marin market in the second half of this year is due to Lucasfilm’s vacating of 160,000sf of office and 168,000sf of light-industrial space in 14 buildings in San Rafael’s Canal District. Relocation of the Lucasfilm operations to the Presidio would boost county office vacancy by 250 basis points and industrial by 500 basis points, according to estimates from David Walwyn, Orion's research director.

The good news is that some of the weakest Marin submarkets have been enjoying the greatest proportion of leasing activity, led by small tenants seeking top-class space. In fact, no leases were inked for more than 10,000sf last quarter, according to Kevin Pirizzoli, North Bay market research analyst for BT Commercial Real Estate.

The million-square-foot southern Marin submarket, made up of Sausalito, Tiburon, and Mill Valley, had a vacancy rate of 9.6% in the first quarter, compared to 11.9% a year prior, according to BT Commercial. Orion estimates vacancy there was 10.6% last quarter, a drop from 17.4% a year ago or even 14.1% at the end of 2004.

A similar story is unfolding in the central Marin cities of Corte Madera, Greenbrae, and Larkspur, where Orion estimates vacancy is 6.1%, compared with 12.3% a year ago.

"We've not seen single-digit vacancy in many years," Mr. McCubbin says. In fact, Marin's office vacancy rate had fallen to 2.1% in the third quarter of 2000, according to Orion.

As office vacancies slip below the 8%-12% level commonly considered to be balanced, owners of property with smaller spaces (i.e., less than 5,000sf) are starting to offer fewer concessions such as free rent, according to local brokers. That is bringing asking and contract rents closer together for smaller suites, though pressure on rents remains for spaces larger than 7,500sf, according to Mr. Pirozzoli