[caption id="attachment_70230" align="alignleft" width="200"] Dave Peterson[/caption]

The Santa Rosa office market continues to be challenging for property owners with vacancies. The vacancy rates for the fourth quarter of 2012 was 16.8 percent for Santa Rosa up slightly from 16.6 percent a year ago.

While higher than the doldrums of 2009-2010, tenant touring activity continues to be modest. Most activity is in the range of 500 square feet to 3,000 square feet with a few larger tenants also considering moves. We are still on the “slow road” to recovery and expect tenant demand and rents to continue to increase throughout 2013 as business confidence continues to increase.

Tenants still have the ability to take advantage of opportunities in the market to upgrade to higher quality space and in most cases are able to do so while lowering their occupancy expenses.

Inventory of the highest quality buildings is becoming more limited, and there is a large discrepancy between the asking rents for class A space to class B and C space. The overall full-service asking rents for all quality types range from $1.48 per square foot per month to $2.25 per square foot per month. However, we have seen some recent transactions made in the $1.10 to $1.25 per square foot full-service range on the low end.

Tenant inducements such as free rent and/or turnkey tenant improvement packages are still prevalent in most lease transactions. Many owners continue to desire higher contract rates while providing free rent to “effectively” reduce the rent in the tenant’s eyes.

Interest rates for SBA real estate loans remain at record lows providing an opportunity for owner-user companies to take advantage purchasing real estate with minimal down payments. Lenders are also now willing lock in these historically low rates over 20-25 year periods. Even with the current low market rents, most companies can purchase a building for less than they can rent it for especially when the advantages of depreciation and equity build-up are taken into account. Current asking prices for owner-user office buildings range from $85 per square foot to $368 per square foot with the majority of properties priced between $140 and $200 per square foot.

Foreclosures have decreased substantially and most of those opportunities have come and gone. There are still a couple properties on the horizon likely to head this way, but we are unlikely to see a substantial uptick in these inventories in the future as the market continues to strengthen.

Given current rent levels, we are unlikely to see any new office construction in the near term. However, it should be noted that there are only a few larger blocks of contiguous space (20,000 square feet and larger). This lack of inventory will put pressure on large space users to consider build to suit options or be forced to consider relocating to Rohnert Park or Petaluma.

In order for speculative office development to start up again, we will need to see rents rise by 25 percent-35 percent from their current levels.

Significant recent transactions: Sutter VNA Hospice leased 18,000 square feet at 100 Stony Point. Wedbush Securities leased 4,500 square feet at 2455 Bennett Valley Rd. Stifel Nicholas leased 4,000 square feet at 3554 Round Barn.