[caption id="attachment_20909" align="alignleft" width="108" caption="Dave Peterson"][/caption]

The free fall of the Santa Rosa office market has slowed and tour activity has picked up substantially since the first of the year.

This increased activity leads us to believe that we have been at the bottom of the market over the past few months. We are cautiously optimistic that we will continue to see signs of recovery throughout the remainder of 2011.

However, landlords and sellers continue to lease and sell their properties well below asking rates and selling prices. This likely will continue for a shorter period of time, as many property owners struggle to lease their buildings and plug the holes in their net incomes.

The Santa Rosa market showed some signs of improvement in the third quarter of 2010, with vacancy rates dropping rather significantly.  This is the result of just more than 100,000 square feet of positive absorption in that quarter.

The overall vacancy rate for offices in the city was down to 14.4 percent for the third quarter and stayed at 14.5 percent in the fourth quarter, indicating little growth activity as companies tended to make lateral moves from one property to another. The rate was 15.7 percent in the second quarter.

The market still has room for improvement. The year-end vacancy rate is 2.5 to 3 percentage points higher than what we saw during the market peak.

Major lease transactions over the past few months include 46,278 square feet by the county of Sonoma, 23,546 by Morgan Stanley Smith Barney, 15,400 by ProSight Specialty Insurance and 7,724 by Think Tank Photo. These are in addition to a few sizable lease renewals by Zainer Rinehart Clarke, Wachovia and Wells Fargo Advisors.

Much of the overall market vacancy is centered in the western and southwestern quadrants of Santa Rosa, with rates of at 18.2 percent and 35.3 percent, respectively.

The current market condition could swing from tenant-favorable to landlord-favorable very quickly if we continue to see the level of positive absorption over the next few quarters that we saw in the third quarter.

However, most of the fourth quarter and first-quarter tenant activity appeared to be lateral movements, or movement to a space of about the same size. That will impact vacancy in specific areas but not have much impact on an overall market in the first quarter.

Tightening of the market -- including fewer alternatives and higher rental rates -- is on the horizon. Companies considering a new location should be analyzing their opportunities now.

Office vacancy in Santa Rosa submarkets AreaBase (sq. ft.)

Total vacancy (sq. ft.)

Vacancy rate

Southeast1,154,692sf80,963sf7.00%Fountaingrove629,701sf48,731sf7.74%Downtown1,622,771sf185,888sf11.50%College/Mendocino801,068sf98,883sf12.33%N. Dutton/Cleveland1,148,164sf172,829sf15.05%Stony Point550,041sf99,970sf18.20%Southwest698,764sf246,671sf35.30%