Southern Marin County office building owners compete for tenant on improvements costs

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North Bay commercial real estate market reports

Read more insights from experts in various product types and areas in Sonoma, Solano, Marin and Napa counties: nbbj.news/crereports19

We expect to see the trends of the last couple years for San Rafael and south in Marin County to continue throughout 2019, among them, higher costs for tenant improvements and more investment sales.

So we are recommending that office space users begin their searches earlier due to the limited supply and increased construction costs.

We are recommending that building owners work with the construction trades and their advisory teams to be creative about delivering the quality, updated office suites that tenants desire in a cost and time effective manner.

And low borrowing rates and clear tenant demand for quality spaces continue to support investments in the market’s office product.

Pricing for southern and central Marin County office space ($4.70 per square foot monthly, full service) continues an upward trend, while remaining below the averages in San Francisco central business district ($6.51). While vacancy rate changes in southern and central parts of the county were fairly flat over the last year, more space was leased than made available in 2018 (absorption). The best-quality spaces continue to be in highest demand, though all types of office space are being leased throughout this market.

As the average asking rate in the submarket pushes through $4.70, and the best spaces transact at $6.50 and above, some ask if we are approaching a ceiling from a pricing perspective. When we compare pricing on a regional basis, however, we see that this market remains below other key areas in the greater San Francisco Bay Area.

The better spaces in San Francisco are surpassing $8, and rates in areas like Sand Hill Road in Palo Alto are surpassing $9 and $10. These comparisons, when combined with the lack of new supply and rising construction costs, lead many market watchers to expect continued price escalation in this market.

We continue to see firms leaving San Francisco, especially professional services companies. As San Francisco struggles with high occupancy costs and added expenses such as gross receipt taxes, expensive parking and expensive tenant-improvements costs, more firms are relocating to Marin.

Often, these firms have executives who live in Marin. They are finding added benefit from reduced travel times, better quality of life for the employees, and reverse commutes. We continue to see growth from the strong entrepreneurial spirit in Marin, as a variety of financial, technology, creative, biotech and health care firms expand.

High-quality spaces are in the highest demand. These are spaces with new, quality finishes, views, personality, and common-area amenities. Tenants want to be located near restaurants, cafes and easy commute options. Electric car charging stations, showers, conference rooms and LEED-certified buildings are all items on tenants’ wish lists.

Southern and central Marin have had very little new office product added to the market over the last decade, therefore it is up to the existing buildings to invest and update to meet the needs of today’s tenants.

While most of Marin was spared from the North Bay fires of the last two summers, their impact is felt throughout this commercial office market. The costs for modifying spaces has become much more expensive and time-consuming. With over 20,000 homes lost, the construction industry — especially, the subcontractors — are very busy rebuilding lost homes.

This is having a significant impact on the cost to remodel office spaces and commercial buildings and appears to be the new norm for the foreseeable future. Those owners working on creative solutions that can provide tenants with the spaces they want in a cost- and time-effective manner will be the most successful.

North Bay commercial real estate market reports

Read more insights from experts in various product types and areas in Sonoma, Solano, Marin and Napa counties: nbbj.news/crereports19

WeWork just opened its first North Bay coworking location, in Mill Valley, and the fast-growing company has already signed an agreement to expand within Belvedere Place. WeWork is joining groups like Regus, EBC Marin, Studio 333, Office Evolution, The Hivery and VenturePad that all provide slightly different options for executives and others looking for the benefits of flexible arrangements and the potential for extra services, amenities and comradery.

While coworking is gaining notoriety on a national basis, this is not a new trend for this market. Marin County leads the Bay Area in home-based workers and has always had a strong entrepreneurial spirit that has sought small, flexible office solutions. While not the right solution for all businesses, the increase in supply of coworking options continues to be absorbed, and we anticipate more options coming.

There are currently two large office complexes on the market for sale: The Harbors in Sausalito and Belvedere Place in Mill Valley. Both projects transacted a few years ago, and current ownership has made investments in these assets to improve the common areas and tenant suites. These quality updates are expected to deliver a reasonable profit to the owners and may provide the needed proof points that other owners have been waiting for as they make determinations about next steps for their properties.

With interest rates still at relatively low numbers on a historic basis and expectations of increased inflation, many continue to view this as a good time to make investments in real estate. We are not seeing as many sales of smaller buildings and continue to watch for more transactions in that market segment.

Whitney Strotz is managing principal for the North Bay team of Cushman & Wakefield.

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