2010 Trends: For commercial real estate, '09 ends with some positive signs

Brokers and owners of North Bay commercial real estate were happy to see the departure of 2009, with its rising vacancy and unemployment rates, slumping property values and challenging finance market. But as the year came to a close, there were at least some hopeful signs that 2010 will show improvement.

“It’s a good time to be a tenant and a buyer,” said Annette Cooper in Keegan & Coppin’s Santa Rosa office. However, getting financing for operations and property acquisitions remains difficult.

Unemployment rates, a key leading indicator for commercial real estate demand, remained at high levels – above 10 percent for all North Bay counties except for Marin County’s best-in-the-state 8.1 percent – as 2009 was ending. Absorption of commercial space in Napa, Sonoma and Marin counties was expected to be negative for the year.

“We’ve been bouncing along the bottom all this year,” said Al Coppin, president of brokerage Keegan & Coppin. “Some companies that have some confidence are considering moves in the first quarter.”

For instance, in Petaluma, which has the highest office and industrial vacancy rates of major North Bay submarkets, about 411,000 square feet of industrial space deals were in progress at the end of the year, according to Trevor Buck in NAI BT Commercial’s San Rafael office.

Other commercial property brokers  also noted an unusual increase in interest in leasing larger office and industrial spaces in the last two months of 2009. “Big box” retail spaces have been tougher to market, though some interest in moving forward with deals is expected if year-end sales are stronger than expected, according to Tom Laugero of Keegan & Coppin.

Most of the activity earlier in the year was from tenants comparing their spaces with what the market would offer, according to Paul Schwartz in NAI BT Commercial’s Santa Rosa office. “Recently, I’ve seen transactions on new locations. It’s a positive sign and shows there are credible leasing opportunities out there and some companies are making the move.”

Brian Eisberg in Orion Partners’ San Rafael office said the interest among companies in early 2009 to find smaller spaces as they trim their employee counts started to change as the year ended. The ability to find higher-quality space for less rent has accelerated, he said.

“Earlier in the year it was a flight from quality to value, and now we’re starting to see a return to quality,” he said.

Though there was increased interest in expansion options at the end of 2009, some large deals were taking longer complete than in previous years, brokers noted.

Mr. Schwartz attributed the expanded deliberation time to greater internal analyses of a greater number of properties on the market and more time spent negotiating with multiple owners.

Rents property owners were asking for at year-end appeared to have stabilized after falling almost as much as commercial property values, which declined by 25 percent to 50 percent in the past two years. For example, retail lease rates for top malls are being quoted 25 percent below those of two years ago, and many retail asking rents are 40 percent lower, according to Mr. Laugero.

“It’s a big deleveraging time,” Mr. Eisberg said. “But it helps employers build companies.”

Some owners are willing to take substantially less to get cash-draining assets off their books. The pending sale of Cisco Systems’ 170,000 square feet of office and warehouse-office space in five vacant Petaluma buildings is estimated to fetch only 20 percent to 25 percent of the $30 million paid for them in 2005.

Some experts predict such a sale price will negatively impact local property values, but others assert that the Petaluma market and the configuration of a couple of the buildings put the portfolio in a different class.

A slowing of the decline in asking rates suggests to some market watchers that owners have reached a point of diminishing returns on offering lower rates to fill space. Yet the need to keep buildings occupied, even if on short-term below-market leases, can be necessary, according to Barry Palma in Orion Partners’ Santa Rosa office. Common land-use rules call for property uses to revert to underlying designations, such as those established as part of a general plan update after a building was constructed, after a certain time period of total vacancy.

State and local officials have been considering flexibility in that because of economic conditions.

In Napa, the majority of deals for office space in 2010 likely will once again be subleased and aggressively discounted vacant space, according to Michael Moffett of Coldwell Banker Commercial Brokers of the Valley. He, too, has been noticing an unusual increase in leasing inquiries, but the number of listings has been rising faster than the number of transactions completed.

“Vacancy rates around the North Bay and beyond are such that we will see little relocation, because companies largely can find good deals in the markets they already are in,” Mr. Moffett said.

One of the market challenges in Napa proper is a growing amount of available medical office space, he said. A number of physicians have been retiring, and new doctors coming to the area are being consolidated into larger offices to save on overhead costs. Older medical office buildings can need sometimes costly upgrades to comply with the Americans With Disabilities Act, so these physician groups tend to look for newer space.

An example of pressure being brought on owners because of high selling prices in the past few years and significant vacancies is the nearly 30-year-old medical office complex at 1100 Trancas St., according to Mr. Moffett. The property sold in July 2007 for more than $15 million and received more than $1 million in upgrades, but some put the value today at around $10 million.

The 63,000-square-foot, two-building complex is listed as a loan-workout opportunity by the commercial mortgage-backed security tracking service Trepp LLC.

A bright spot for the commercial property market heading into 2010 could be industrial space, according to Mr. Palma.

“At a recent Commercial Investment Exchange meeting, lenders said that investors are willing to look at industrial buildings and can finance deals because the vacancy rate is half as much as it is for office space,” Mr. Palma said.

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