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Monday, December 16, 2013, 6:30 am

Commercial Development Guide 2013: Marin County office vacancies fall, rents rise

Expansions fill long-vacant buildings

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    Marin County has California’s lowest unemployment rate, but its office vacancy rate has been high since early 2009. Yet a string of large leases this year is bringing down vacancy rates in certain submarkets and beginning to increase rental rates.

    Despite some sublease space coming on the market from Marin-native Autodesk, the office market in the county generally filled more space than became available — 92,000 square feet of net positive absorption of class A space and nearly 80,000 square feet all together, according to Haden Ongaro, managing director of Cornish & Carey Commercial Newmark Knight Frank’s San Rafael and Santa Rosa offices.

    “Some of the sectors we talk about as drivers of the local economy like biotech, games and health care all showed signs of growth and expansion,” Mr. Ongaro said. “They are growing in Marin, for a change, instead of getting bigger and leaving Marin.”

    Medical office uses are in demand in Marin, as health maintenance Kaiser Permanente and specialty health care providers have been looking for space to expand.

    Vacancy rates still are high in the county. Average vacancy was 25.0 percent for class A space and 11.0 percent for class B space and 20.3 percent combined in the third quarter, according to Cornish & Carey.

    Dwindling availability of space has pushed average asking rents upward, with the most movement in central Marin and north San Rafael. Average class A full-service rent increased 5.7 percent over 12 months to $2.78 a square foot in the third quarter reaching the $3-a-square-foot average at the peak of the market in the fourth quarter of 2007 just before the economic recession.

    Long-term vacancies get filled

    Vacancy rates countywide have been over or around 20 percent since early 2009. Yet properties with long-term vacancies, such more than one of the three buildings at Fireman’s Fund Insurance’s Novato headquarters, vacated converted hangars at Hamilton Landing also in Novato and Marin Commons, formerly Marin Technology Center, in north San Rafael. Yet, the expansion of several companies from Novato to Petaluma and expanding production from existing companies has generated interest in more than 100,000 square feet of industrial space in the historically low-vacancy Novato market, according to Steven Leonard of Cassidy Turley.

    Hamilton Landing

    Two long-vacant office buildings with 120,000 square feet at Hamilton Landing office development in Novato were mostly filled with a flurry of deals earlier this year.

    The closure of The Walt Disney Co.’s digital movie magic group more than three and a half years ago left a 450-job, 120,000-square-foot hole in a large northern Marin County business complex, but planned expansions by three local operations are set to fill nearly all that next year.

    From spring through summer of next year, a few hundred workers are set to move into two converted hangars that Disney’s ImageMovers Digital group occupied from 2008–2010.

    Disney’s lease of the twin hangars-turned-office-buildings runs through January, but renovations already have begun to roll back some of $40 million in tenant improvements that went into the space, according to Michael Barker, managing director of Barker Pacific Group, redeveloper of Hamilton Landing. That lease led to the completion of work to convert former Hamilton Air Force Base hangars to high-tech modern office buildings.

    “It’s better in the long run that there’s more diversity and commitment to Marin companies in growth mode,” he said about replacing one tenant in 30 percent of the development with three.

    Novato digital animation and video-game development studios of New York-based Take-Two Interactive (Nasdaq: TTWO) signed leases to expand its presence in the 403,000-square-foot Hamilton Landing office complex to 105,000 square feet. The Novato-based 2K group is set to occupy all but 15,000 square feet of 60,000-square-foot Hangar 9, one of the former ImageMovers Digital buildings.

    The company declined to comment on how many employees it has now and what’s driving the expansion. A year ago before a 30 percent expansion in space in Novato, the company said it had more than 300 employees there. In spring of this year, the company started setting up a motion-capture, or mocap, studio in Petaluma. Take-Two acquired the Marin group in 2005 from Sega and moved it to Novato.

    Meanwhile, Novato-based Raptor Pharmaceutical (Nasdaq: RPTP) leased nearly 11,000 more square feet in 60,000-square-foot Hangar 7, adding to the nearly 31,000 square feet committed to in early summer. The developer of treatments for rare diseases has about 65 employees at a smaller facility elsewhere in Novato and around the world. Raptor outsources production of its lead drug Proscysbi, which is approved in the U.S. and Europe. The company plans to roughly double its global workforce in the next 12 months and is hiring for medical, clinical, regulatory compliance, manufacturing, analysis, sales, finance and information technology positions.

    Joining Raptor in the rest of Hangar 7 is set to be EDG Interior Architecture, currently in 10,000 square feet in downtown San Rafael. The firm leased nearly 19,000 square feet in Novato. Formerly Engstrom Design Group, the firm got its start in 1987 when interior designer Eric Engstrom went out on his own. Ms. Johanson was a business partner for two decades, helping to build the firm from three employees to 50 now in San Rafael, Dallas, Singapore and Bangkok. Mr. Engstrom retired in 2007 and died in June at age 70.

    The Pasha family has been moving automobiles, heavy equipment and property of military personnel on oceans and highways worldwide starting six decades ago, and now the company is rigging its headquarters for a move to support business growth of 3.5 times in the past decade. The company leased nearly 50,000 square feet of former Autodesk office space at 4040 Civic Center Dr. in the Terra Linda area of north San Rafael and plans to move its 175 headquarters employees there from Corte Madera in early October.

    More than three decades in the making, a brisk pace for sales growth for Vionic Group in the past few years has the maker of therapeutic fashion footwear planning to double the size of its headquarters and boost its staff there by more than one-third. Sales have grown 115 percent a year over the past four years, are on track to soar 60 percent this year and are projected to rise 50 percent in 2014. Meanwhile, sales growth for footwear overall has been in the low single digits. In February, Vionic plans to start expanding into 21,000 square feet at 4040 Civic Center Dr., where Vionic already occupies 18,000 square feet. The company employs about 70 in San Rafael and spent about $2 million in office renovations in office upgrades in the past two years. Vionic is looking to hire 20 to 25 in the next six months, mostly in product design and development, e-commerce and customer service.

    Another long-term vacancy has been the three-story, 131,000-square-foot office building prominently atop a Terra Linda hilltop. Built four decades ago as headquarters for a publisher, the building could become home to seniors rather than office workers under a plan to convert it to housing. If brought to fruition, One Thorndale in north San Rafael would be a novel move for some of the older North Bay commercial space that has been vacant for years and amounting to as much as a quarter of rentable office space in certain submakets.

    Sausalito-based Berg Holdings Corp., which owns the vacant One Thorndale Drive building, wants to create 77 age-restricted flats on all three floors, rather than the current configuration of offices on the top floor and part of the second plus parking in the remainder. The conceptual floorplan calls for a cafe on the first floor, fitness center on the second floor and meeting rooms on the top floor.

    There had been interest from large tenants — particularly, Kaiser Permanente and Marin General Hospital — for much of the 70,000 to 80,000 square feet of available office space in the building in recent years, but those deals either fizzled or have stalled, according to Brian Eisberg of Cornish & Carey, who is marketing the property with David Walwyn. Submission of a formal application is planned for early next year.

    Large property sales

    One sign of emerging stability in the Marin office market have been sales of large properties. Basin Street Properties, which owns dozens of office, industrial and retail buildings in Sonoma County, returned to the Marin County office market after an eight-year absence with the purchase of a nearly 100,000-square-foot bayside complex. Basin Street in late October bought the 98,652-square-foot Shoreline Office Center along Richardson Bay at 100 Shoreline Hwy. from an affiliate of Equity Office Properties for $22.25 million, or $225 a square foot.

    “With the office market in Marin County experiencing a substantial resurgence in recent years, especially in light of skyrocketing San Francisco rates coupled with falling vacancy rates, Shoreline is the perfect property for us to make our re-entrance here after selling our Novato properties in 2005,” said Matt White, president and chief executive officer of Reno-based Basin Street Properties. “Shoreline’s waterfront location, proximity to Marin County’s beautiful landscape, and short drive to San Francisco is ideal for many businesses that value a strategic and accessible location for employees, like Glassdoor.”

    Glassdoor, a 6-year-old creator of a website that provides jobseekers with an internal look at company culture, in late June signed a lease for 30,500 square feet at Shoreline. The company plans to relocate from Sausalito early next year and intends to have around 200 employees at that time, hiring another 100 in 2014.

    Basin Street sold 90,000-square-foot Woodside Office Center and 115,000-square-foot Golden Gate Plaza, both in Novato, to Equity Office as part of a $263 million portfolio sale in mid-2005.

    Also in contract for sale are two other Marin properties for Equity Office — 126,000-square-foot Drake’s Landing Office Park in Greenbrae and 80,000-square-foot Wood Island Office Complex in Larkspur — as well as 4040 Civic Center in San Rafael.

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