Back-to-office uncertainty looms over north Marin County office market

The commercial real estate market is a mixed bag right now, with multiple trends colliding as we move toward the post-pandemic era.

Positively, public transportation is rebounding, all-time high office lease rates in southern Marin County , and tracking of back-to-office through parking and building security card swipes shows a slow upward back-to-the-office trend.

Several northern Marin companies are in the market looking to stay in San Rafael or Novato close to employees. Some are downsizing and looking for shorter term leases.

There remains hesitation for some companies to commit to commercial space long term. Shorter leases and downsizing is a trend while companies figure out what “back to office” means.

Almost three years from the start of the pandemic, there is a lack of clarity for office demand. The 100% in-office model and the 100% remote model seemingly are not the options for most companies and employees. There are some expectations in leadership discussions that the recent layoffs are indications remote employees should be seen in the office more.

Finding the balance between hybrid models and the “hub and spoke” models are the current trend with some migration out of San Francisco to suburban areas. The bulk of activity in northern Marin consists of companies moving within the North Bay.

Shorter lease terms affect the total dollars an owner can spend on tenant improvements. Construction costs are at an all-time high. Having pre-built “speculative spaces” has been attractive for both owners and tenants.

Flight to quality is a trend. The best buildings are doing well, whereas other lessor quality buildings are struggling.

Outdoor amenity space has also become a trend. Owners are investing in property-level amenities rather than individual suite designs to help companies attract employees back to the office. This may be bocce ball courts, gyms, outdoor eating spaces, or shared conference room space.

In general, building owners who have made these investments are more attractive to companies and are doing better. Amenity availability is also steering some companies to downtown areas.

Another trend starting to take shape is what to do with the abundance of office space on the market.

There is talk of converting properties to meet housing demands. There are multiple office buildings that are in talks to be converted into residential. The question becomes what happens if conversion to residential does happen, what will occur when back-to-the-office has materialized and we have less commercial space to fit the demand?

Economically, rising interest rates and lack of office demand are forcing lenders to tighten available funds and creating pressure on owners that have loans coming due. If an owner originally financed at 4% and is now seeing potentially 50% higher interest rates of 6% or 7%, this will influence getting new financing.

The North Bay is far better off than some other areas because overall lease rates have held steady as has occupancy. We haven’t experienced the glut of sublease space that other markets have experienced.

One exception is Autodesk’s vacating its 115,000-square-foot former headquarters at 111 McInnis Parkway in San Rafael in the fourth quarter. Despite this occurrence, our overall vacancy rate in Marin rose modestly from 18.4% to 19.3%.

Haden Ongaro is executive managing director and North Bay market leader at Newmark (nmrk.com).