North Bay commercial property builds on economic gains
Last year saw a solid recovery for the North Bay economy, and the commercial real estate market has improved accordingly.
Leasing activity and occupancy levels are the highest in seven years. Occupants are increasingly acquiring their own buildings, as it is so favorable over leasing.
Portfolios of the office–flex buildings taken to market by institutions and large investors are now partially through the cycle and being either sold or leased on an individual basis to occupants.
Macromarket pricing of commercial buildings is rising accordingly. Vacancy rates dropped more than 2 percentage points during 2014, and space shortages in industrial and flex space are showing up in many submarkets.
There is almost no speculative office space being developed, except for the Museum on the Square building in downtown Santa Rosa, one incubator property in south Santa Rosa and a build-to-suit at the airport. There are virtually no speculative North Bay industrial buildings going up.
Marin County has not seen an industrial building start in years, and that is why the vacancy rate is under 4 percent. North Bay governments should be responding to the lack of industrial–flex space. Without new business parks and buildings, existing businesses will find it hard to expand, and new emerging businesses will look elsewhere to start up.
Growth of the North Bay economy and corresponding job growth has been fueled in large part by having quality business parks and space readily available for companies to startup, grow and expand. If you don’t have the buildings up and ready to occupy, companies will move to where they can expand and new companies will move to areas where new companies are supported by local amenities and government. This has always been a policy shortcoming: recognizing the importance of having quality business parks and downtowns to retain and attract businesses.
Smart occupiers of space and investors are snapping up North Bay buildings, particularly in Sonoma County, as debt service for 90 percent loans mostly is less than market rent. This will continue as long as interest rates remain at the all-time low levels of the last two years.
Remodeling of office buildings and, in some areas, total replacement of single-story flex and old office buildings where high density construction is allowed will be on the rise in the next few years in downtowns and in selective business parks. Tenants and occupiers are demanding high-density urban environments with highly planned landscapes integrated with generous services and recreational amenities. Outside areas will include many services - fitness, food and beverage, convenience and recreation. Interiors will be open plans with generous common space for shared desk-bench work areas and living room–style lounge conference-team meeting rooms. Layouts will minimize private offices and hierarchal and functional divisions.
Architecture is trending to using sustainable material and LEED-certified buildings, which will become part of all new, remodeled and repositioned space.
These trends largely are coming from social media and high-technology companies in San Francisco and South Bay. While they won’t transform North Bay real estate, given the limited new development, the trends will affect remodeling and new building.
Investors returned in 2014, and that should continue. Capitalization rates dropped during the last year in Sonoma County from 6 percent–7 percent to 5 percent–6 percent. Local community banks are making loans to investors at record low rates, fueling the high level of sales. This should continue into 2015, at least until the Fed raises the discount rate.
North Bay job-creation rates have been among the highest in California. This should keep the demand for space high and put pressure on rental rates, particularly for industrial and retail.
Growth spillover from social media and tech will bode well for concomitant North Bay growth.
Al Coppin is president of Keegan & Coppin Co., Inc./ONCOR International.
