By James Manley, Keegan & Coppin Co. Inc.
There was a high level of office market adjustment within Petaluma in 2010, but commercial real estate in the city overall appears poised for continued recovery.
Office and industrial lease rates will rise slightly throughout 2011. However, no rent surges appear to be close at hand.
As property portfolio purchases near completion, we should witness an increase in sale prices toward the second half of this year.
While many landlords adopted a wait-and-see approach last year, some strong-willed speculators saw the depressed prices as an opportunity to invest in a market that can’t remain dormant for much longer.
In early 2010 Basin Street Properties acquired a controlling interest in Petaluma Marina Business Center. Cornerstone Properties leased out approximately 50,000 square feet of their 187,000-square-foot portfolio of former Cisco buildings. Digilock occupied one of two acquired buildings on Willowbrook.
There has been high activity in office acquisitions and sales in the Redwood Business Park because of bank offerings of 13 of former Equity Office Properties holdings. EOP directly sold 1179 North McDowell to Petaluma Health Care District in the latter half of 2010. Only one or two other individual properties sold from that portfolio.
The balance, much of which remains in escrow, was sold to portfolio investors.
The downside of this activity is that many individual investors interested in ownership are under the incorrect perception that they can purchase individual office buildings for $48 per square foot. This misperception has slowed office market recovery as small-cap investors’ expectations slowly rise back to real-world pricing. That pricing is still pre-1995.
Lease rates for office space in this adjusted market range from 75 cents per square foot for off-path or second-generation office space up to $1.25 for most other office space.
Properties such as Petaluma Marina still command prices above $2 a square foot. Increased activity in both Marin County and Santa Rosa has led office tenants to seek motivated landlords in Petaluma.
The city’s office vacancy rate dropped significantly last year to 33.8 percent in the fourth quarter from 41.3 percent at the beginning of 2010. While we’re not out of the woods, Petaluma is traveling a path of recovery.
Industrial activity remained fairly flat throughout 2010, but such buildings never experienced the level of volatility inherent to the office market.
Manufacturing and distribution have long been Petaluma mainstays. Rents remained constant throughout the year, and we are now seeing users in the 50,000 to 100,000 square foot range take a serious look at southern Sonoma County in general and Petaluma in particular. Most of those users are buyers, but there are few properties to accommodate that size range.
It is encouraging to see renewed interest in large relocations to Petaluma. Many of these users occupy much more traditional industries such as food, light manufacturing and distribution. This is in contrast to the office and R&D markets, demand for which continue to be dominated by companies making in technological advances.
Industrial vacancy dipped slightly to 16.8 percent from 18.1 percent over the course of the past year. Rents remained virtually unchanged between 65 and 85 cents per square foot.
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