Commercial Real Estate Guide: Sonoma County

The significant reset in Sonoma County commercial property values that started for distressed Petaluma office buildings in early 2010 is expected to continue to help spur business activity through the end of 2011 and beyond.

"The current and consistent theme we're certainly seeing is that companies are taking advantage of the current marketplace and are repositioning their businesses with more economical rents for better facilities with better amenities," said Shawn Johnson, managing partner of Keegan & Coppin/ONCOR International.

Countywide vacancy dropped from 23.6 percent to 22.6 percent in the third quarter of this year, the fourth consecutive quarter of declines in that rate, according to Cassidy Turley BT Commercial.

"In all, the market has absorbed just over half a million square feet of previously vacant space over the first nine months of the year," said Garrick Brown, Northern California research director for Cassidy Turley BT.

Much of the office occupancy growth has been in Petaluma. A net of 237,000-plus square feet of office space has been absorbed so far this year, yet overall office vacancy in the city remained high at 27.6 percent in the third quarter, one year ago it stood at 37 percent, according to Mr. Brown.

"Petaluma has been the shining star in terms of recovery, given how far it had fallen and what has happened and is likely to happen in the balance of this year," said Sean Heaton of Cushman & Wakefield.

Since early 2010, more than 1.2 million square feet of Petaluma office, flex and industrial space has changed ownership, and a number 20-plus buildings were "distressed" properties, meaning the rent income wasn't sufficient to cover property debt.

Deals for half to a third of the cost to build attracted buyers interested in immediate or future facilities for their companies. Examples are Natural Comfort from Novato, Dharma Trading from San Rafael, Berkeley Nucleonics from San Rafael, Xandex from Petaluma, Petaluma Farms, Paul Mitchell Schools from Sacramento and Mountanos Brothers Coffee from South San Francisco.

Some are converting buildings from office uses to industrial, as they were originally designed. "There will be more of a nuts-and-bolts industrial approach to Petaluma as opposed to a lot of office deals," said James Manley of Keegan & Coppin's Petaluma office.

Basin Street Properties, which built many of the Petaluma buildings that changed hands, this year has repurchased and held seven buildings, including two that will accommodate Petaluma-based Enphase Energy's 96,000-square-foot expansion around year-end. San Mateo-based Cornerstone Properties has purchased seven Petaluma buildings and has spurred a number of companies to expand and relocate from around the county, such as CrossCheck from Rohnert Park, First California Mortgage from Petaluma and Lowepro from Sebastopol.

Longtime Petaluma property owner RNM Properties retained Gap's Athleta division headquarters in 40,000 square feet of new space in south Petaluma.

A few more significant distressed Petaluma properties may come to market in the next 12 months, but a number of local real estate experts consider the bottom of the market already reached there. Basin Street has received premium offers for the properties just purchased.

There's debate among local experts, though, on whether there will be a wave of distressed sales elsewhere in the county.

Overall asking rents for office space have yet to fully stabilize, although they have for class B buildings, according to Mr. Brown.  Slightly higher vacancy for class A has meant that this part of the marketplace remains highly competitive, he said.

"There's a trending toward stabilization in the market, but that by no means there will be an upward pressure on office prices in the next 12 months," said Jeff Negri, head of Cassidy Turley BT's Santa Rosa office.

For the first three quarters of this year, the county's industrial space market absorbed about 444,000 square feet of previously vacant space, lowering vacancy from 12.4 percent to 10.8 percent in that time, according to Mr. Brown.

Mr. Johnson predicts the industrial market will improve through the rest of this year, as it has in the previous few quarters.

Major industrial deals recently were Innovative Molding's lease of 120,000 square feet at Sonoma Mountain Village in Rohnert Park in an expansion from Sebastopol and Redwood Empire Food Bank's purchase of a 60,000-square-foot empty Avery Weigh-Tronix building near Sonoma County Airport.

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