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Commercial Real Estate: Businesses opting for short-term leases amid economic uncertainty

NORTH BAY – Local businesses are opting for shorter-term or less demanding lease terms because of uncertainty about the economy and financial markets, according to real estate market experts.

“We’re seeing many tenants unwilling to commit to lengthy lease terms,” said Bill McCubbin, president and chief executive officer of commercial real estate brokerage Orion Partners.

Orion’s estimates of third-quarter office vacancy in Marin and Sonoma counties showed rate increases in all submarkets except in south San Rafael. Sonoma’s vacancy was 21 percent, compared with 18 percent at mid-year.

Vacancy of Sonoma’s class A office space rose to 27 percent from 25 percent and class B vacancy rose to 16 percent from 12 percent. Gross leasing decreased to 125,000 square feet in that time from 210,000 square feet in mid-2008.

On the flip side, Marin’s vacancy rate held at 16 percent, with 293,000 square feet of total leasing in the third quarter, which is an increase from the two previous quarters.

About 80 percent of 600 local business owners and executives told Peter O’Brien, an Orion agent in Santa Rosa, that they are looking to reduce risk because they don’t know how much or how long the financial and economic troubles will affect sales.

As a result, many companies are seeking lease terms of two years or less and don’t want to renew leases for more than 12 to 18 months, according to Mr. O’Brien. Those that continue to be actively looking for facilities – government agencies, health care providers and some high-technology startups – are taking longer to decide and are looking at more properties.

The short-term leasing is similar to North Bay commercial real estate market conditions with the economic slowdown in 2001, according to Mr. O’Brien.

In Napa, a number of office vacancies related to the housing market slowdown plus relocations to new large projects have increased vacancy by 25 percent from last year, according to Michael Moffett of Coldwell Banker Commercial Brokers of the Valley. Two more relatively large downtown office projects are expected to be complete next year and increase the vacancy rate in the city limits to about 17 percent or 18 percent.

Similarly, retailers hurt by tightening consumer purse strings increasingly are asking shopping center owners to restructure the operating-cost portions of their rent bills commonly tied to gross sales, according to Mark Koenig of Terranomics Retail Services in San Rafael. Center owners making deals have adjusted rents by about 15 percent to 20 percent from a year ago.

“In a market where leasing velocity is very weak, and if they want the tenant to be in the retail mix three to five years from now, landlords are saying that if they help in a down market they want to monitor sales a year or two from now then re-adjust rents,” he said.

Terranomics’ mid-year retail market report for Marin County, the most recent available, estimated 5.1 percent of 3.64 million square feet was available, up from 4.0 percent at the end of 2007.

Commercial real estate brokerage Keegan & Coppin estimated third-quarter retail vacancy in Sonoma County to be 4.7 percent of 17 million square feet, up from 3.6 percent a year before.