s
s
Sections
Sections
Subscribe

The surging deal activity for multifamily, retail, industrial and office properties around the Bay Area is beginning to make inroads into the North Bay, according to local real estate market experts.

Multifamily properties continue to be among the most active commercial investment markets in the North Bay, according to experts.

[caption id="attachment_76719" align="alignright" width="180"] Jeff Mishkin[/caption]

“As slow as the North Bay has been to respond to the improving market in general, there are some good signs,” said Jeff Mishkin, San Francisco-based regional manager for Marcus & Millichap. The brokerage has completed or has in contract more than two dozen investment deals in the North Bay so far this year, and most of those have been multifamily properties.

There are more active buyers for multifamily complexes in Sonoma and Marin counties than there has been for at least seven years, and that activity has been growing since the end of the first quarter of last year, according to Scott Gerber in Cassidy Turley's San Rafael office.

[caption id="attachment_76720" align="alignright" width="130"] Scott Gerber[/caption]

"The market is strong, but it is not the H-word," Mr. Gerber said. "The fundamentals in my market for these investments is still very sound and very good. In a 'hot' market, prices stop making sense."

For example, a buyer of a Sonoma County property could expect a deal to have a capitalization rate of 5 percent to 6 percent -- perhaps, in the 4 percent range for new properties -- upfront cash-on-cash returns of 4 percent to 6 percent and a multiplier for a prospective deal of 10 to 14 times gross rent revenue, according to experts.

"Rents moving up are helping the market overall, so there is a positive outlook for multifamily investments," said Rami Batarseh of BN Commercial in Santa Rosa.

Investors priced out of the "hot" San Francisco, Peninsula and South Bay markets are turning to secondary Bay Area markets, experts said. This, they note, could accelerate as the cost of financing increases, such as a 75-basis-point rise in 10-year Treasury rates recently.

Apartment vacancy rates in North Bay markets in the low single digits and rising rents should spur multifamily property construction, but the cost of building new product is high, according to Mr. Gerber and Mr. Batarseh.

"Every apartment builder I know is idle right now because the permit and entitlement structure is such they can't afford to build proejcts," Mr. Gerber said.

If the total cost of fees and other charges from local government were to return to $25,000 per unit, as many as 1,000 units could be built, but a number of builders are facing fees of $35,000 to $40,000 a unit in Sonoma County, he said.

[caption id="attachment_76721" align="alignleft" width="180"] Ken Bizzell[/caption]

It is a catch-22 for local government, because fee structure is supposed to be based on the costs of processing project documents and less construction results in less fee revenue. Also part of the fee structure covers public-works improvements, leading to higher costs in certain parts of a city, according to Ken Bizzell, a Keegan & Coppin partner and specialist in residential development properties.

Buyers of residential land are interested in multifamily projects because of rising rents, but the prices they are willing to pay are almost half of prices at the peak building period in 2006--2007, he said.

"Land selling for apartments was getting in the high $30,000 a unit or more, depending on the neighborhood, and now you're looking at $15,000 a door, depending on developer impact fees," he said. Impact fees for improvements amount to $6,000 a door in southwest and southeast Santa Rosa, pushing potential sale prices down to $9,000 a unit in those areas, he noted.

With varying reports on a shortage of lender-owned single-family homes and houses for sale in general, builders have been more actively looking for land since last fall than they've been in seven years, according to Mr. Bizzell.

Yet beyond apartments, several sizable commercial buildings have been sold around the North Bay recently, including the mid-June sale of a 38,000-square-foot office building largely occupied by a Veterans Administration clinic near Charles M. Schulz--Sonoma County Airport and a 15,000-square-foot industrial building occupied by Enphase Energy in Petaluma for $2.2 million also in June.Retail vacancy dwindles

[caption id="attachment_76722" align="alignleft" width="200"] Tom Laugero[/caption]

Retail space vacancy has dwindled to single-digit rates in Sonoma County, including dramatic improvements in persistently vacant Rohnert Park, according to Tom Laugero, a Keegan & Coppin partner.

"The flavor of the retail pulse is tenants are out there and looking for deals," he said.

Santa Rosa Avenue retail sites are filling up with new dealerships and a challenging opening for Smart & Final after several years of work. After a number of big-box vacancies for years, Northbay Centre in Rohnert Park has just 2,400 square feet available after the openings of 24 Hour Fitness and Chipotle Mexican Grill, according to Mr. Laugero. Also new to the city are planned Panera Bread and ground-up Walgreens drug store projects.S.F. office deals boil over to Marin

[caption id="attachment_76723" align="alignleft" width="180"] Whitney Strotz[/caption]

"As tenants are facing some significant increases in renewal proposals from landlords, they are exploring moving to the North Bay," said Whitney Strotz, managing director of Cassidy Turley's San Rafael office. An example of such as move out of the city is a 5,000-square-foot office lease law firm Quint & Thimmig signed in Larkspur Landing Office Center, a deal he helped broker.

While the premium for being in downtown San Francisco class A office space versus in the nicest Marin has to offer wasn't that much in 2010 and 2011, the gap widened has widened quickly since last year as vacancy in the city plummeted. San Francisco owners were asking for $3.05 a square foot per month in 2010 and $2.94 in 2011, compared with Marin asking rates of $2.60 and $2.52 for those years, according to Cassidy Turley. While Marin's average asking rate stabilized at $2.50 last year and the opening months of 2013, downtown San Francisco's average soared to $3.51 last year and $3.91 this year.

[caption id="attachment_76731" align="alignright" width="468"] The gap between rents owners of office space in downtown San Francisco and in Marin County are asking has widened rapidly in the past 18 months. (source: Cassidy Turley)[/caption]

"Last year, absorption was at average levels or slightly below, but it feels like it is increasing for the second and third quarters," Mr. Strotz said.

There were 210,000 square feet of office space net absorption in Marin for the 12 months ending in March, according to Keegan & Coppin/ONCOR International. Key contributors to that were BioMarin Pharmaceutical's expansion to 120,000 square feet of headquarters space at San Rafael Corporate Center last fall, the county of Marin's shift of departments to half of one of the mammoth Marin Commons buildings and Raptor Pharmaceuticals expansion to 40,000 square feet at Hamilton Landing in Novato. Other notable office expansions have come from video game developers, by 2K and Toys for Bob at Hamilton Landing and by Telltale Games in San Rafael.Marin industrial rebounds

[caption id="attachment_76724" align="alignright" width="180"] Nathan Ballard[/caption]

Marin County is having a significant uptick in leasing activity, particularly in industrial real estate, according to Nathan Ballard in Keegan & Coppin's Larkspur office.

"Office (leasing) really started to pick up in the last half of 2012 but it was very slow in industrial (leasing)," he said. "In the first part of 2013, industrial was starting to pick up."

Industrial space in Marin historically has hovered around 5 percent vacancy for years, but the economic recession caused a spike in available space, largely in northern part of the county, starting in early 2010, according to Mr. Ballard. The vacancy rate for such space rose to 7.0 percent by the second quarter of 2011 and 8.2 percent a year ago.

"It had to do with many of these spaces being leased by small entrepreneurial companies, and many did not make it through the recession," he said. "But in California we're seeing a record number of startups, and those people need space, much of which is smaller industrial spaces that have been the backbone of the Marin industrial market."

In the 12 months ending in March of this year, net absorption of industrial space in Marin was nearly 100,000 square feet, half of which was in Novato, according to Keegan & Coppin figures. That sent the countywide industrial vacancy rate down to 6.8 percent in the first quarter of this year. The rates for such space in Novato fell to 13 percent from 16 percent a year before and in San Rafael to around 5 percent from 7 percent 12 months earlier.

Some of the north Marin industrial vacancies have come from companies moving to Petaluma, notably as The Office Playground, SPG Solar and Biosearch Technologies. Yet, this space has been getting re-occupied. That includes a pending purchase Mr. Ballard is brokering for the former SPG Solar building at 20 Leveroni Ct. in Novato.Big deals continue to circle Petaluma

[caption id="attachment_76725" align="alignright" width="180"] James Manley[/caption]

In addition to roughly 700,000 square feet of retail space being completed or about to come out of the ground at two new regional malls, Petaluma continues to garner attention from large industrial users, according to James Manley in Keegan & Coppin's Petaluma office.

"In so far as large spaces goes, there likely is not enough to meet the demand," he said. In addition to pending leases and sales of tens of thousands of square feet with local companies, companies from outside the area have Petaluma on their list of potential expansion sites.

For large tenants -- those needing more than 50,000 square feet -- availabilities are tightening, and for those looking for more than 75,000 square feet, only a handful of options fit, according to Mr. Manley.Vacancy rates decline in Santa Rosa area

[caption id="attachment_76726" align="alignleft" width="180"] Shawn Johnson[/caption]

Though Sonoma County has been leading the nation and state for several months in its job-growth rates and year-over-year net employment gains, office vacancy rates in the county have been declining from very high levels slowly.

"Office space needs have not grown to levels we would have expected, based on the uptick in the economy and overall better outlook," said Shawn Johnson, managing partner of Keegan & Coppin.

Local employers likely have learned how to be more efficient in their operations, so they largely haven't reached the point at which they need to hire many more employees or lease more space, he said.Napa improves via deal 'trickle'

[caption id="attachment_76727" align="alignleft" width="180"] Michael Moffett[/caption]

While the need for more key retail sites in downtown Napa is at a premium, the demand for leasing office space has been moderate, according to Michael Moffett of Coldwell Banker Commercial Brokers of the Valley.

"You put a bucket under a trickle leak, and it fills up eventually," Mr. Moffett said. "Most of the giveaway space is gone. Owners of spaces that are left are not going to do stupid deals. Incentives such as free rent are starting to dry up."

Asking rates range from $2 a square foot per month on gross basis for entry-level office space in Napa to $3 on a triple-net basis for the newest, best space, according to Mr. Moffett. Proposed rents for retail start at $2 gross and go up to $3.75 triple net, depending on downtown location. Industrial storage for spaces in the few thousand square feet ranges from 85 cents to $1.25, all on a gross basis.Solano shifts to construction

[caption id="attachment_76728" align="alignright" width="160"] Phil Garrett[/caption]

Decreasing vacancy in existing industrial space making new construction tenable in Solano County, according to Phil Garrett, managing partner of Colliers International’s Fairfield office.

"Market continues to tighten and vacancy dropping," he said. "Land and development are coming back into focus as result of the continued lack of inventory."Large deals of the quarterJuly 15, 2013

Large industrial, retail and office sales and leases in North Bay counties in the second quarter of 2013. [read more]