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North Bay Commercial Real Estate Review 2011Read reports from experts in various commercial real estate markets in Marin, Napa, Sonoma and Solano counties.

Businesses are more confident about securing space for their operations this year than they were in the past two, according to local commercial real estate market experts.

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Sonoma County job growth is leading that of other counties in the state, observed Al Coppin, president of commercial real estate brokerage Keegan & Coppin Co. Inc. He pointed to major leases in the Highway 101 corridor in Sonoma and Marin counties in the past several months: Cyan Optics, Calix, Metier, Central Payment Corp., BioMarin Pharmaceutical, ProSight Specialty Insurance and Amy's Kitchen.

"There's a lot of seed and venture capital -- little growth seeds -- and it's working," he said. "A year ago we forecast the county would come out ahead of the rest of the state for that reason."

Class A space in the corridor has been filling up at rents at the same level they were at least 10 years ago, sometimes much older.

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"The challenge in 2011 is filling the [class] B space, which is some cases is priced the same as the [class] A space," Mr. Coppin said. "There has to be adjustment for landlords on that."

The Silicon Valley and San Francisco office markets are starting to show signs of constriction, which historically foreshadows a pickup in deal-making in southern Marin, eventually moving north into Sonoma County, according to Sean Heaton of Cushman & Wakefield.

"I do not think we're at the point where rents in San Francisco are driving tenants to Marin yet, but the wheels are moving, and if they continue to move it will help the North Bay," he said.

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Owners of office space in southern Marin are enjoying falling vacancies and rising rents, according to Steven Leonard of Cassidy Turley BT Commercial. A key example is Wachovia's several-year lease of 14,000 square feet at 790 Lindaro St. in San Rafael, marking the first significant lease since Seagate Properties' 80,000-square-foot deal completed the fourth San Rafael Corporate Center building in fall 2009.

"There's a lot more going on now than there was a year ago," Mr. Leonard said. "Tenants are in the market and willing to do deals."

Some of the activity is being generated by new owners of formerly distressed real estate who can offer rents not seen in some markets for two decades because of far lower cost bases, the experts said.

Rowland Plaza and Wood Hollow office developments in Novato have gone from having significant or total vacancy to nearly full in the past year. Equity Office Properties buildings in Petaluma and Santa Rosa that were sold by lenders are attracting tenants and buyers.

More than 200,000 square feet of office and industrial leases are in final negotiations in Petaluma, but Alcatel's leases of 120,000 virtually vacant square feet in Equity Office's remaining holdings in the city are set to expire this spring.

Petaluma has a two-tier office property investment market, according to Mr. Coppin. In one, distressed properties -- ones with not enough rent income to pay debt secured at the peak of the market several years ago -- are selling for $40 to $50 a square foot, namely former Equity Office Properties holdings. That's basically the cost of the land, he noted.

The rest of the Petaluma office market is getting interest in the $100-a-square-foot range, which is still below the replacement cost of the buildings. However, that reflects the current level of office rents in such properties, Mr. Coppin said.

"The reality is scarcity of land and expense of developing it -- very expensive, such as Petaluma fees for development of $5 to $6 a square foot," he said. "Rental rates should tighten up in a couple of years because of lack of supply and the cost of replacing that supply."