Southern Marin asking rates jump as vacancy drops

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Southern and central Marin continues to see escalated pricing and decreasing availability.

Largely driven by limited supply of quality options and the strong San Francisco market, this office submarket saw an 8.4 percent increase in asking rates and a 17 percent reduction in vacancy over the past year. Currently, this portion of the county combines for an 8.1 percent vacancy rate and a $3.88-a-square-foot average monthly asking rate across all office building types.

The multiple years of double-digit rent growth in San Francisco is causing many companies to experience a near doubling of rent when they consider renewing their leases. In addition, San Francisco brings additional challenges in the form of transportation costs, local business taxes, commuting times and quality-of-life issues.

As a result, we continue to see entrepreneurial, financial service and professional service firms looking to locate in Marin County. Access to public transportation hubs, food and exercise amenities, parking and building quality are key factors for these businesses.

RENEWAL-RATE SHOCK

After nearly two years of below 10 percent vacancy, many Marin businesses are also finding renewal rental rates to have escalated at a steeper rate than their leases. As these businesses mark-to-market during the renewal process, they are finding rates to be significantly higher. These increases are a result of both the increased demand and the lack of quality spaces.

The highest rates are being found on water-view spaces and spaces with new improvements. Ordinary class A spaces in southern and central Marin have been transacting for $4.25–$4.75 monthly full-service rental rates. Asking rates for suites with better views and/or finishes are into the $6.00 range.

MORE SUBLEASE SPACE

Interestingly, there has been a slight uptick in availability of sublease spaces over the past year. It will be interesting to watch whether this becomes a sustained trend or a temporary blip.

Sublease space can provide a healthy alternative for companies, and the market have had a very limited supply over the last couple years. While subleasing can be a good alternative for some companies, it offers its own challenges that should be carefully considered before executing.

GOOD TIME FOR LARGE PLAYERS

Several of the larger properties have recently changed ownership. Larkspur Landing Office Park in Larkspur was purchased by Jamestown LP; Harbor Drive Executive Park in Sausalito, by PM Realty Group; and Restoration Hardware’s Corte Madera campus, by Menlo Equities. As we are seeing throughout the county, many of the large, institutional owners have decided this is a good time to transact commercial real estate.

The visibilities into pricing trends and opportunities to reinvigorate a property have facilitated the sale process. Many of these sales represent new high valuations for the properties, and the relatively low interest rates have supported their business models. Many of the new owners have exciting plans to continue to upgrade the buildings and suites inside the properties.

FLIGHT TO QUALITY

We continue to see businesses willing to pay higher rents for quality space and expect to see ownership groups continue to update the quality of their buildings. Quality office space helps with employee recruitment, retention and morale and better reflects the image of the business. Owners hesitant to invest in upgrades and improvements are seeing slightly slower absorption of vacancies and have not been able to increase prices as much.

We often see institutional sale transactions before individual transactions and anticipate more of the smaller buildings selling over the next year. At the moment, we have a significant lack of supply of buildings for sale. While swings in the equities market over the first few months of 2016 have created some concerns over the direction of the economy, the stability of the Marin office market has shown this to be a solid investment.

Whitney Strotz is North Bay market leader for Cushman & Wakefield (cushmanwakefield.com). He is based in Larkspur.

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