Marin-Sonoma commercial real estate: 2017 will be much like '16
Pondering the North Bay commercial real estate in 2017 my mind drifted back to 1975 and the song Willin' by Lowell George and his wonderful band, Little Feat and the lyrics: “If you give me weed, whites and wine, and you show me a sign, I'll be willin,' to be moving.”
The song and its main lyrics, ostensibly about truck drivers, is just one substance shy of describing the North Bay commercial real estate market, It is driven in large part by the emerging business of cannabis as well as a booming wine industry, along with one of the latter's derivatives, hospitality.
Let's take a look at where the commercial real estate market has been lately, because in 2017 it will be much of the same. The keywords are “investment sales” (large and small), “Fireman's Fund” and “pot.”
PROPERTY SALES
Out-of-town investors “discovered” Marin County commercial property a few years ago. They came here seeking better investment yields as the competition to buy commercial property in core markets went from cold to warm to hot to frothy in the last five years, making it difficult to get good returns in San Francisco, LA, Chicago, etc. Some 40 percent of Marin's Class A office buildings were sold in the last three years. This trend is continuing.
In November, Haden Ongaro, Mac Cranford and Mark Carrington with Newmark Cornish & Carey sold the Belvedere Place office complex in Mill Valley to a partnership comprised of Portland, OR-based ScanlanKemperBard Companies LLC – a privately held merchant bank, and New York-based Angelo, Gordon & CO., a privately held investment advisor. Newmark C&C reports that the Class A, 103,375-square-foot property sold for $452 per square foot.
Yet it is not just institutional investors buying and selling commercial real estate. The so-called “Mom and Pop” buildings have been trading ownership with routine frequency – especially since the economy has recovered. For example, Meridian Commercial's Matt Brown, Mike Lieberman and Samuel Ko were involved with the sales of 514 Fourth Street in San Rafael.
FIREMAN'S FUND
Fireman's Fund Insurance Co. left Novato for Petaluma, leaving a 700,000-square-foot, three-building campus in favor of about 85,000 square feet of space on N. McDowell Blvd. in Petaluma.
Everyone knew it was coming so it wasn't a shocker when Jeff Quackenbush from this paper reported on Dec. 28, 2015, that it was official. Fireman's Fund's exit remained newsworthy in 2016 for a couple of reasons. Rumors swirled on-and-off again that Google was eying the campus for a North Bay outpost.
A riveting idea, yet the main reason Fireman's Fund was a catalyst for the news is that it caused the overall Marin County office vacancy rate to spike from 15 percent at the close of the fourth quarter of 2015 to 19.1 percent by the beginning of 2016, according to Newmark Cornish & Carey. The vacancy rate has remained the same, more or less, ever since.
I know there are many people that remain hopeful that the Fireman's Fund commercial space could be re-occupied by an office user but I am a skeptic. In part because I was the commercial real estate beat reporter for the Silicon Valley Business Journal in the early and mid-1990s and reported on the trials and tribulations of a similar campus back then – Borland Software, which was in Scott's Valley and just over the hill from San Jose toward Santa Cruz. Borland (which was to software in its day what Twitter is to social media today) built a one-of-a-kind campus in 1993 at a reported cost of $120 million
It was in such an out-of-the-way place that when the company faltered, the campus quickly got the handle of “white elephant” because the software company, property investors and the like could not find a long-term occupier. After a few different owners tried to resurrect the real estate, the sprawling 24-acre, 370,000-square-foot property finally sold at auction in July of 2013 for a little more than $12 million – a price that was barely a tenth of what it cost to build.
In my opinion, the Fireman's Fund property should be converted to housing, preferably senior housing with some great community space. The reason for this point-of-view is demand driven, or more accurately, the lack of demand for Marin office space.
On a good year the county is lucky to have 200,000-250,000 square feet of positive net office absorption, and in 2016, net absorption was negative 240,999 square feet, according to Newmark Cornish & Carey's Fourth Quarter Office Market Report.
There may be some feasibility issues to overcome but the sooner everyone comes to grips with the obsolescence of the Fireman's Fund property as an office complex, the faster we can utilize the real estate, help solve the housing shortage crisis and keep from repeating the mistake of a Borland Software campus that was mostly empty for a decade. If I end up wrong on this take, I will be happy to have been wrong.
