2013 North Bay Commercial Real Estate Review

Each year the North Bay Business Journal turns to leading commercial real estate professionals across the North Bay to share their data and insights on the state of the markets.  Following is an outlook for 2013 commercial real estate in the North Bay.

San Rafael and Novato are most-active Marin Office Markets

According to Haden Ongaro, Cornish & Carey Commercial Newmark Knight Frank, despite 220,000 square feet of user-controlled inventory added to the market in Novato and San Rafael in 2012, net absorption of office space for the year was 46,000 square feet.  For the Marin market as a whole, net absorption was slightly negative.  Absent unexpected new major additions of user-controlled space, a continued gradual decrease in vacancy in 2013 is expected.  Asking rents will edge higher as additional buildings raise asking rental rates.

With just more than 4 million square feet of class A office space, San Rafael and Novato have almost 78 percent of Marin County’s class A inventory.  At the end of the fourth quarter 2012 there was almost 1.4 million square feet of office space available in Novato and San Rafael — a vacancy rate of 23.6 percent.  The availability of these spaces has kept a lid on rent growth, but class A direct asking rents have edged higher in the northern half of Marin county, from $2.42 a month at the beginning of 2012 to $2.46 in the fourth quarter.

San Rafael and Novato were the most active Marin cities in terms of square feet leased in 2012.  Health care and digital entertainment companies continue to be the most active contributors to office leasing activity in Marin.

Balance tips to owners in Southern Marin

Whitney Strotz, of Cassidy Turley, feels the balance of power in the office market in southern and central Marin County continues to move in favor of landlords.  Much of the quality space has disappeared with asking rents continuing to increase.  The vacancy rate remained mostly flat for 2012, but the average monthly asking rate jumped nearly 10 percent in southern Marin to $3.32 per square foot from $3.04.  The best-quality spaces in terms of views and visibility are garnering rents over $4 a square foot, with the highest rent transactions approach the $5 range.

When compared to areas like San Francisco, true occupancy costs in southern Marin — inclusive of parking costs, gross receipts taxes, commuting costs and initial build-out expenses — remain lower.  Looking forward into 2013, there is an increase in demand over historical levels.  Over 80 percent of the prospective space users are looking for larger premises to accommodate anticipated increased head count.

The trend continues to be toward more open work spaces to create more collaborative work environments.  To be effective in these open areas, businesses have to create different types of areas for private calls and semiprivate meetings.  Space planners and furniture vendors are becoming more valuable in this process.

North Bay properties can draw northward migration of Bay Area Creativity

The San Francisco and South Bay Area growth phenomenon in technology and social media is providing unprecedented construction and related economic multiplier effects throughout the region, according to Al Coppin, President, Keegan & Coppin, Co., Inc.   Enthusiasm is spilling over, even into quiet spots in the market like the North Bay.  Money is being spent here in wine clubs and hospitality.  That intellectual capital will create companies, some starting in the North Bay or moving here.  Hence, we have the migration of waves of creative energy and people moving from south Bay to north.

Sonoma County’s BEST program has the single biggest opportunity to attract jobs and people here.  The commercial real estate brokerage community will do the rest.  Team those visionary pieces with specific land and facility opportunities in the North Bay, and we will get our share of tech and social media companies moving north.  We are forecasting a 1 percentage-point reduction in vacancy rates for office and industrial properties, and as much as a 2 percentage-point reduction in retail vacancy rates.

Sonoma County has one of the highest  job growth rates in California.  This has reduced the unemployment to 7.7 percent in Sonoma County and 5.5 percent in Marin County.  Going forward we see substantial increases in sales of commercial real estate properties as investors realize we are at the trough of the market, with prices on the rise. Lenders are much more aggressive in commercial property loan offerings with rates that have not been available for 50 years and will probably rise by year end.  As a result, we expect investment activity to rise 20 percent this year.