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They’re not building much of it anymore. Constraints on construction of office space in Marin County plus its closeness to San Francisco has made Marin real estate a hot item for investors and tenants alike in recent years.

But pricing and lack of options also is partly contributing to some slowness in whittling down vacancy rates.

The proportion of available space in the Marin County office market in the third quarter of this year was pretty much where it was a year ago, around 20 percent, according to Haden Ongaro, who leads Newmark Knight Frank’s North Bay brokerage team. That’s about double what’s often considered to be a balanced market.

“Things have been basically flat from a vacancy point of view,” Ongaro said. “That’s largely because the majority of our vacancy is in north San Rafael and Novato.”

The square footage of vacant spaces in those two submarkets represent half the availabilities in Marin County, he said.

First there was the departure of Fireman’s Fund Insurance Company, now Allianz, from Novato in early 2016 to Petaluma. Allianz’s former 710,330-square-foot Marin campus at 773–777 San Marin Drive has roughly 100,000 square feet of subtenants.

Then two other big subleases became available in the north Marin office market in 2016 and early 2017. Most notably, Fair Isaac Corp. is offering the entire 124,196-square-foot building at 200 Smith Ranch Road in north San Rafael for sublease.

“For a small market, a 100,000-square-foot sublease has a big effect,” Ongaro said.

And startup Raptor Pharmaceutical vacated 60,979 square feet at Hamilton Landing in Novato after its $800 million merger with Horizon Pharma.

This increase in available sublease space is part of a larger trend seen across the Bay Area.

FEWer SPACE OPTIONS

But despite this persisting and new vacancy, asking rental rates countywide have increased about 3 percent in each of the past three years, Ongaro said. While rents overall haven’t moved much in northern Marin, asking rates in central and southern Marin have jumped 18 percent in the past three years.

While a number of new property owners have undertaken renovations to bring the buildings up to modern standards and finishes, proximity to San Francisco has a lot to do with it, Ongaro said.

But the true measure of Marin vacancy is how many opportunities typical tenants have to find new space, according to Matthew Brown of San Rafael-based Meridian Commercial.

“It’s really tricky to come up with a lot of alternatives over 10,000 square feet,” Brown said.

Not much gets built in Marin because it’s an expensive place to buy land, to build and to live, not only for company owners but also for employees, he said.

One thing that might change that metric is the growing groundswell in the Bay Area and California’s capital for building more housing quickly to ease a shortage that’s often called a crisis, Brown said. Part of a 15-bill affordable-housing package passed by the Legislature on Sept. 15 was Senate Bill 35, which streamlines approval of housing projects in locales that have not been meeting regional goals.

“That could crowd out office projects, certainly in the county of Marin,” Brown said. “If you can build housing without discretionary approval, why beat your head against the wall to build office? The price per square foot of rent for residential is about the same as for office.”

OFFICE SALES SLOW IN 2017

A string of big Marin office property sales since 2014 reached a crescendo last year, but sales activity has slowed this year as it has nationwide, according to real estate information service CoStar. A sizable seller last year was Equity Office Properties, commonly known as EOP.

Last year, Portland-based ScanlanKemperBard and Angelo, Gordon & Co. acquired the 103,000-square-foot 1 and 2 Belvedere Place in Mill Valley for $46.75 million, or $453 a square foot, according to CoStar. The price reflected a 5.7 capitalization rate, an investment metric for comparing the purchase price and property income. ScanlanKemperBard in 2015 bought Hamilton Landing, a seven-building Novato office campus with 406,000 square feet, for $84 million, or $206 a square foot, at a 6.3 percent cap rate.

Also last year, Atlanta-based investment and management firm Jamestown bought nearly 200,000 square feet of space 700, 900, and 1100 Larkspur Landing Circle for $82 million, or $412 square foot, at a 5.5 percent cap rate, CoStar reported.

Two other big deals were for 1 and 3 Harbor Drive in Sausalito plus 3900 and 3950 Civic Center Plaza in San Rafael. PM Realty Group and the Roseview Evergreen Fund bought the two-building, 114,000-square-foot Sausalito office complex for $34.8 million, or $304 a square foot. Union Property Capital acquired the San Rafael property from Broadreach Capital Partners for $28 million, or roughly $295 a square foot, at a 6.4 percent cap rate.

One active seller of Marin office properties in the past 12 months has been Marin Community Foundation. In April, it sold the 11,869-square-foot, two-story office building at 1115 Third St. in central San Rafael sold for $4 million, or $337 per square foot, according to Newmark Knight Frank.

Marin Youth Center had been there from 2004 to 2011, and incubator Renaissance Entrepreneurship Center operated there from 2012 until winding down in 2015. The buyer was San Francisco-based Pederson Media Group, a communication, marketing and advertising agency with clients such as Apple, Siemens, Adobe, Visa and Genentech. Pederson plans to occupy the building, the brokerage said.

The foundation sold two San Rafael office buildings last November, getting multiple offers above the asking prices. The 24,485-square-foot 30 N. San Pedro Road building sold for $6.42 million, or $262 per square foot. The 23,358-square-foot 555 Northgate Drive building sold for $5.44 million, or $233 a square foot.

Bigger Marin office sales this year have slowed, according to CoStar. Only two buildings sold for more than $5 million through August. One was 851 Irwin St., purchased for $9 million, or $330 a square foot, by Novato-based Professional Financial Investors.

The other traded in a real estate do-si-do emblematic of the tight Marin office market. Nonprofit builder EAH Housing acquired the former QuadraMed building at 22 Pelican Way in San Rafael from CellMark for $12.5 million, or about $396 a square foot. EAH expanded from about 21,000 square feet that was leased at 2169–2173 E. Francisco Blvd. in San Rafael.

A month later, CellMark signed a lease for nearly 20,000 square feet at 88 Rowland Way in Novato.

PLANNED OFFICE PROJECTS

Marin has been short on new multitenant office space, particularly sizable projects. Since 2000, there have been 29 mainly smaller, infill office projects, bringing 1 million square feet to the market, according to CoStar.

ScanlanKemperBard plans to build a 53,000-square-foot office building on the remaining vacant land in the Hamilton Landing development, according to Ongaro, whose team has been leasing the project for nearly two decades. With a recently large expansion by local startup pharma Ultragenyx, the development is now full.

“It should be available to start in spring 2018, if we have a tenant for 25,000 square feet of that building to kick it off,” Ongaro said.

The new Hangar No. 8 is set to look like the concrete aircraft hangars built in the 1930s for the Air Force and later Army base. Barker Pacific Group bought seven in 1998 and in 2001 started renovating them one by one into class A office space. The last construction at Hamilton Landing was nearly a decade ago, with the overhaul on 120,000 square feet in two vacant hangars for Disney’s ImageMovers Digital, which never moved into the space before leaving Novato.

Other sizable Marin office space being built recently and in store for the next few years is more space around BioMarin Pharmaceutical’s San Rafael Corporate Center main office and research facility.

Potentially in the offing are long-talked about reworkings of the former Fireman’s Fund campus in Novato and of Birkenstock’s vacant warehouse on its Highway 101 frontage property north of the same city.

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers the wine business and commercial construction and real estate.