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SONOMA COUNTY MARKET ANALYSIS: Low interest rates, economic diversity seen as balancing impact of housing

SONOMA COUNTY – Just a few years after an economic correction among high-technology companies led to hundreds of thousands of square feet of office and industrial space flooding the market, Sonoma County is facing a another wave of business contraction as residential real estate-related companies close or consolidate their operations.

In mid-2008, the countywide office vacancy rate ranged from 18.5 percent to 24.9 percent of the 8.5 million to 10.5 million square feet of office space in the county, according to estimates from Orion Partners and NAI BT Commercial, respectively.

But with the most active leasing areas of the county in downtown Santa Rosa and the business parks near Charles M. Schulz – Sonoma County Airport north of the city, real estate experts said a combination of low interest rates and strong local economic diversity should soften the impact.

“We’ve had past downturns of five to seven years each with different structural issues, but this time we have relatively cheap financing and a more diverse and deeper economy than in the past,” said Al Coppin, president of commercial real estate brokerage Keegan & Coppin. “That bodes well for Sonoma County than the rest of the state and the national picture.”

That said, the credit crunch has crimped lending sources for some investors, as institutional sources are more difficult to secure and banks require larger amounts of cash in the deal, according to NAI BT Commercial. The brokerage found that Sonoma County sales volume for larger office and industrial properties in the first half of 2008 was $52 million, compared with $71 million in that period in 2007 and $120 million the year before.

One of the largest sales so far this year was the nearly $18 million purchase of the 183,000-square-foot office building and warehouse at 755 and 775 Southpoint Blvd. from Ken Martin. San Francisco-based father and son real estate law firm Stephens & Stephens LLC, which owns a number of commercial buildings in the Bay Area, purchased their first North Bay holding in late June. Trevor Buck from NAI BT represented Stephens & Stephens.

The unemployment rate in Sonoma County rose to 5.6 percent in June 2008 from 4.4 percent at the half-year point last year, according to estimates by the state Employment Development Department.

Put in perspective, the county tied with San Luis Obispo for the seventh-lowest unemployment rate of any county statewide. The state jobless rate was 7.0 percent in mid-2008, and the nation’s was 5.7 percent.

Total employment in Sonoma County increased 1.4 percent in the 12 months ending in June 2008, according to state figures. The number of employees in the county grew by 800, or 0.4 percent, over those 12 months, but some economic sectors hard-hit by the housing market slowdown had the largest job losses, with 1,000 fewer positions in construction and 300 less in financial services, according to state figures.

Contraction in those sectors is seen in tens of thousands of square feet of office space being available for lease or sublease as a result of office closings or consolidations among some mortgage, title and residential real estate companies.

However, unlike during the contraction among local telecommunications technology companies in the first few years of this decade, these new vacancies often are totally offices, rather than the research and development–oriented space once occupied by tech firms, according to Paul Schwartz of NAI BT Commercial.

Making up for the job losses were 600 more manufacturing positions available in June 2008 than a year before; 1,000 more in the trade, transportation and utilities sector – largely in retail sales; and 600 added in professional and business services.

Some of the largest office leases in the first half of 2008 have been for expanding health care organizations and technology companies. For example, Sutter Medical Foundation North Bay leased 63,000 square feet of the recently renovated Landmark Executive Center building in northwest Santa Rosa. Basin Street Properties is constructing a 40,000-square-foot building at its Harvest Business Center development near the Sonoma County airport to house a high-tech Veteran Affairs regional clinic.

And a big boon to not only the high-tech job market but also for the market for research-and-development space near the airport is the return of the stent-maker now known as TriVascular2 in 110,000 square feet by the airport after more than a year’s absence.

The 17.3 million-square-foot county industrial market has lower vacancy than the office market at around 10 percent, according to Keegan & Coppin and NAI BT. That was about the same rate of vacancy from a year before, even after 82,000 square feet of net absorption over 12 months, according to NAI BT.

Some owners of industrial property have been upgrading, retrofitting and renovating their buildings to accommodate a wider array of tenants. For example, Cornerstone Properties spruced up one of the former Weigh-Tronix buildings near the airport to accommodate office tenants and has landed several companies.

Other examples are the overhaul of former DSI space at 3033 Coffey Lane in Santa Rosa to accommodate a Stan Bennett health club and Waldman Management’s creation of commercial condos in former Willitts Design space at 1129 Industrial Ave. in Petaluma.

For retailers wanting to open a venue in the county, uneasiness about the economy has been delaying decision-making, according to Tom Laugero of Keegan & Coppin. Top locations are able to get the highest rents and the biggest-drawing retailers, but other shopping centers are proving difficult to lease.

“It’s harder to make a deal for occupancy this year than it is for occupancy next year or in 2010,” he said. That’s when retail industry analysts are predicting a turnaround in consumer spending with improvement in the economy. That bodes well for more than 1 million square feet of retail developments planned to be built in Petaluma and Santa Rosa.