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Experts see budding recovery this year, but it will be slow

NORTH BAY -- After a commercial real estate market in 2009 with relatively little leasing and even fewer sales, local experts are seeing early signs that 2010 could be noticeably better.

That's the overall theme of the market reports featured in the commercial real estate report in this issue of the Business Journal [see the 2010 North Bay Commercial Real Estate Review].

[caption id="attachment_19246" align="alignleft" width="141" caption="Al Coppin"][/caption]

Al Coppin, president of Keegan & Coppin/Oncor International, has seen more optimism among North Bay companies, with more looking for space in the first months of this year. Activity for the brokerage, which has offices in Marin, Sonoma and Napa counties, decreased by about half since mid-2008 as of January.

"There are a lot of tenants that want to pull the trigger and do things, but some can't get financing and some are afraid to do anything," Mr. Coppin said.

However, that increased activity needs to be sustained to be proof of recovery, albeit a slow one. He is projecting a 20 percent increase in transactions this year, which still would be far below pre-slump activity.

[caption id="attachment_19264" align="alignright" width="141" caption="Sean Heaton"]Steven Leonard

Steven Leonard of Cassidy Turley BT Commercial said 2010 likely will bring a "firming up" of the office leasing market along the Highway 101 corridor in Marin and Sonoma counties. Rather than moving rents back up from five- or 10-year lows, property owners may be able to reduce aggressive incentives this year, such as including typical tenant improvements and months of free occupancy in lease deals, he said.

Attractive rates and available space are attracting medical office users in Marin. Marin Healthcare District leased 14,000 square feet in Larkspur, and two physician groups are eyeing a total of 55,000 square feet.

"Typically, Marin's absorption rate is like a wave crashing on the beach from south to north," Mr. Leonard said. "Hopefully, we're getting the early signs of that."

Low rental rates in Petaluma, where a third or more of the office space is available for lease, have brought out companies from inside the county and from outside the North Bay looking for space, with three alone seeking up to 150,000 square feet, according to Mr. Leonard.

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Many of these heavily discounted properties are focused on office space with significant vacancy, particularly those that were built or improved for specialized uses, such as high-technology research and development, according to Cushman & Wakefield's Sean Heaton, who was part of the team that sold Cisco System's five-building Petaluma campus to a Cornerstone Properties venture in late December.

"A developer right now is not incentivized to spend a high amount on a property because it will have to use cash and have to spend more on converting it to a more generic use," he said.

Commercial real estate financing has become increasingly available through federal and insurance company sources, but federal banking regulators also have been keeping a close watch on institutions' commercial property portfolios.

The industrial real estate market, particularly for warehouse spaces of tens of thousands of square feet, is notably different, with companies seeking 200,000 square feet of space looking for deals and a more centrally located distribution hub in Petlauma, according to Mr. Leonard. Rental rates for such space has stabilized from about 45 cents a square foot monthly to 60 to 70 cents.

"When these deals go down, we might see a firming up of the industrial market by the end of the second quarter of this year," Mr. Leonard said.

[caption id="attachment_19256" align="alignleft" width="141" caption="Michael Moffett"][/caption]

The vacancy rate for Napa office space in multitenant buildings larger than 5,000 square feet was around 14 percent at last count, but there are a few deals in the works that could fill the vacancies, according to Michael Moffett of Coldwell Banker Commercial Brokers of the Valley. One potential deal includes the city of Napa's interest in occupying the newly completed Napa Square mixed-use downtown building.

Recently, he said he's been going on more tours of properties with prospective tenants and fielding more calls for information on listings.

"I hope that means we have hit bottom and are starting to return," Mr. Moffett said. But, he added, "The return will be very slow."