Marin, Sonoma office leasing revives as interest rates rise, workers return
Summer is usually a slow time in commercial real estate. Business owners typically are more apt to be touring scenic vistas with their children before school resumes than scouting potential new homes for their businesses.
But local commercial real estate experts say this summer hasn’t had the typical seasonal slowdown. That’s an encouraging sign amid months of national headlines of a looming meltdown for commercial property.
“This could be considered a slow time of year, in July headed into August, but I’m seeing a fair amount of activity,” said Haden Ongaro, who runs Newmark’s North Bay operations. He’s been surprised to have a few showings a week midsummer. Two recent inquiries were from San Francisco companies looking to relocate to southern Marin.
The second quarter of this year saw a return to declining Marin County office vacancies, easing to 19.1% of 7.5 million square feet of space in the county from 19.4% and 19.5% in the preceding two quarters and an average of 20% over the past five years, according to Newmark.
A rule of thumb for a market with a balance of available space to lease and tenant demand is 10% vacancy. At midyear, the amount of space being sought in the county was roughly 5.5% of the total inventory, and that demand is expected to pick up as companies continue to exit larger metropolitan areas, the real estate company reported.
One of the largest office leases of the quarter was one such Marin newcomer. Natural-materials veneer maker Lingrove occupied nearly 12,000 square feet in San Rafael in May in a relocation of administrative, design and production from San Francisco, the Business Journal reported in May.
And in a pending lateral move within Marin, San Rafael-based therapeutic shoe maker Vionic, owned by St. Louis-based Caleres, inked a lease for 19,500 square feet in the Hamilton Landing office complex in Novato, set to relocate its headquarters to space that engineering firm EDG Design has vacated in a shift to less than 12,000 square feet in the same development.
While Marin County’s overall office vacancy has been high, it’s been even higher in Sonoma County’s second and third largest cities. The proportion of available space to lease in both Petaluma and Rohnert Park has been over 25% for the past two quarters, increasing last quarter in Petaluma to 26.3% of its 3.6 million square feet, according to Keegan & Coppin Co. Inc.
By comparison, 13.4% of Santa Rosa’s 7.5 million square feet of office space was vacant in each of the past two quarters. There’s been a significant change in the Santa Rosa market in recent months, according to brokerage Keegan & Coppin partner Dave Peterson.
“As interest rates have gone up, we’ve seen a shift back to leasing,” Peterson said.
Before the Federal Reserve started increasing its benchmark rate over a dozen times since March 2022, it was less expensive for a company principal to buy a commercial building to house the business than to lease the needed space. Now, it’s 30% more expensive to buy than rent, Peterson said. Part of that cost difference is that property owners also have been eager to make deals to fill space.
“Landlords are competing for deals,” Peterson said. “They’re nervous about what could have happened and all the talk about the death of commercial real estate.”
What has helped North Bay office markets is that the local economies are more diverse, with fewer tenants occupying significant proportions of the square footage, Peterson said. A tenant that gives up a hundreds of thousands of square feet can make a big dent in San Francisco’s office market, while office downsizings locally have tended to be in the 10,000- to 15,000-square-foot range, he said.
For example, an accounting firm and a high-technology equipment developer had put back on the market 33,000 square feet of office space they have occupied at 110 Stony Point Road in Santa Rosa, but all that space has been subleased, Peterson said. Accounting firm BPM put 18,000 square feet up for sublease, and National Instrument is scaling back from 15,000 to roughly 6,000 square feet there. But this week Santa Rosa City Schools is set to start occupying BPM’s space, and early next year is scheduled to move into National Instrument’s space when vacated.
“The market is good,” Peterson said.
Jeff Quackenbush covers wine, construction and real estate. Reach him at email@example.com or 707-521-4256.