Industrial real estate drives Sonoma County market; firms resume office space search as they adjust to coronavirus
After a pandemic pause that started in March, Sonoma County market experts say companies are reviving their commercial space planning and larger deals may start moving again early next year.
“We saw a substantial slowdown in touring activity and decision making across the board on all product types and sizes over the late spring and summer months,” said according to Dave Peterson, a partner in Keegan & Coppin Co. Inc./Oncor International.
“Activity has been increasing over the third quarter and we are currently seeing office activity in the 1,000 to 3,000 square feet range near ‘normal’ levels. Larger office transactions of over 5,000 square feet have been far fewer in numbers.”
During the recession triggered by the pandemic, commercial real estate activity for some companies dropped below levels seen in the 2001 and 2007-2009 recessions, according to Trevor Buck of Cushman & Wakefield.
“In previous recessions, the downturn seems more evenly distributed across the board,” Buck said. “Pricing and demand simply dropped together. Now we have some companies thriving, while others have nothing in the pipeline.”
Office vacancy in Santa Rosa has increased to 11.97% in the third quarter from 11.4% in the second quarter, according to Keegan & Coppin research. Office vacancy in the north corridor increased to 6.59% from 5.8% in the same time frame.
“Most of the vacancy seems to be a result of expiring leases and those companies’ having smaller requirements going forward,” Peterson said. “Space requirements have been 20%–25% smaller than pre-COVID.”
He thinks that company decisions about the post-pandemic office won’t endure as more is learned about the impact of the virus on their operations.
“There’s a lot of talk about working remotely, but we believe this will be rather short lived,” Peterson said. “While workplace flexibility is likely to continue, we believe the face to face interactions between employees on a day-in-day-out basis drives innovation and that productivity levels suffer when working remotely.”
Unlike the sizable amount of space companies in San Francisco have put on the market for sublease, that hasn’t happened so far with Sonoma County office vacancy, Peterson said.
Subleases have been a key driver of vacancies in San Francisco, with 6.9 million more square feet of the city’s 83.5 million-square-foot office market becoming available than being leased, according to Cushman & Wakefield.
Overall vacancy in the city was 14.1% at the end of the third quarter, up 430 basis points from the second quarter and 860 from a year before. Conversely, the proportion of office space available directly from owners in the city’s central business district was 5.4%, up 90 basis points from mid year and 170 from the start of the pandemic.
The surge in sublease space is weighing on city rents, which continue to be the highest on average among major U.S. markets, according to Cushman & Wakefield.
The amount that owners were asking at the end of the third quarter averaged $6.54 per square foot on a monthly gross basis. That’s down 5.6% from mid year and 0.8% from a year before.
Downtown, the best space is being marketed directly from owners for $7.29 per square foot, down 4.5% from the second quarter and unchanged year over year.
In Sonoma County, the lower rise in vacancy compared with that of San Francisco hasn’t moved local rental rates as much, according to Peterson. While some building owners are lowering how much they’re asking for, landlords are being more aggressive with other incentives in negotiating with tenants.
“Free rent is helping to bridge the gap between owner/tenant expectations,” he said.
Owners of office and industrial space don’t seem to be “getting nervous” about the current market, Peterson said.
While Cushman & Wakefield’s Steven Leonard, doesn’t expect Sonoma County’s office rents will decrease as much as in Marin County. He’s projecting rents in suburban markets closest to the urban core markets of the Bay Area could experience rent reductions as high as 10%–20% in the next 12 months.
“When the demand goes down, rents are not far behind it,” Leonard said. “The industrial market is completely different. Rents have increased 20% over the last year but seem to have plateaued at very healthy rates. I don’t see industrial rents going down in the next seven months.”
Demand for Sonoma County industrial space has been similar to that for offices, but the lack of available inventory remains a constraint, according to Peterson.
Vacancy increased to 5.38% from 4.8% in Santa Rosa and to 2.94% from 2.2% in the north corridor, according to his brokerage’s research.