[caption id="attachment_50690" align="alignleft" width="200" caption="Dave Peterson"][/caption]

SANTA ROSA -- The office market in the North Bay's largest city appears to have stabilized as tour activity and closed transactions have increased substantially compared to 2008-2010 levels. Property owners continue to compete for tenants at rental rates 10 percent-20 percent below the market peak, but competition appears to be that of a more typical market rather landlord desperation seen in recent years.

This new-found confidence seems to be fueled by more positive economic news on corporate profits and hiring on both the local and nationwide levels. However, it has not yet shown up in the vacancy and absorption numbers. Fourth-quarter Santa Rosa office direct and sublease vacancy was about 16.6 percent, up slightly from 16.2 percent in the third quarter and up considerably from 15.4 percent in the fourth quarter 2010.

Throughout 2011, most larger transactions consisted of tenants renewing leases at existing locations: Triquint in 14,000 square feet, Santa Rosa Memorial Hospital in 13,000 square feet, Merrill Lynch in 11,000 square feet, New York Life in 9,700 square feet and Sonoma Bank in 7,000 square feet.

Much of the remaining activity consisted of tenants making lateral moves into less than 5,000 square feet, from one location to another without much growth.

Similar to vacancy, rental rates have remained fairly flat at the end of 2011 but started increasing in early 2012 in higher-quality properties downtown and in the Fountaingrove northeast area. The combined vacancy of those properties -- 9.9 percent --  is substantially less than the 16.6 percent rate for the overall Santa Rosa market. These highest quality properties are demanding monthly per-square-foot full-service rental rates from $1.90 to $2.20, while the balance of the market remains in the $1.50 to $1.75 range with a few anomalies.

Typical of recovering markets, we anticipate the highest-quality properties to have the opportunity to continue achieving much higher rents, while it will take some time and absorption of lower-class inventory before we see substantial increases in those rents.

The Santa Rosa office rental rates will continue to increase in the near term as the best opportunities are absorbed. This is the time for companies to be analyzing the suitability and expense of their facilities and to take advantage of the opportunities in this recovering market.