2019 will be much the same as 2018. While gross domestic product grew at 3.5 percent the last quarter of 2018 here in the North Bay, the economic engine continues to slow due to the fires of 2017. Also, the increasing risks of a national economic downturn will have a dampening effect on decision making.
Just as in residential, commercial property investment inventory — office, industrial and retail buildings — is probably the lowest it’s been in a decade. Build-to-suit commercial/industrial buildings are being developed in Sonoma County, albeit at a very slow rate. The market can absorb 1,000,000 square feet a year of flex and industrial space in Sonoma County, but less than one-quarter of that is being built.
Office space development is at a standstill in Marin and Sonoma counties, with for another year projected net absorption of 150,000 square feet for Sonoma and 100,000 square feet for Marin County.
The majority of leasing activity is from local government, the influx of contractors and post-firestorm services, health care- and some winery-related users, and other professional sectors.
Industrial and flex space will be the most in demand in 2019. Shortages show up in increased rents and more build-to-suits going forward. Industrial build-to-suits are still feasible in Sonoma County, but not so with Marin’s lack of land and pricing.
Office and retail absorption will continue to moderate in 2019 as it did in 2018 in Sonoma County, as many professionals have been affected by the October 2017 firestorms. Restaurants and retail sales also have been affected and have been slow to bounce back.
The activity in commercial real estate investment will also moderate in 2019. With the low inventory and as interest rates continue to inch upward with the fixed Fed rates increasing for the balance of 2019, cap rates will increase along with interest rates, bringing down prices and discouraging sales.
Communities in the North Bay must begin to plan for job and economic growth. The spark we need is for less regulation and more encouragement of industrial development in Sonoma County and office development in Marin County. The economy won’t continue to grow without developing and planning for future business centers and parks.
And business growth and job growth should be the mantra of the entire North Bay. Cities and counties should lead the way in reducing regulation and spearheading lobbyists to fight the overwrought and unrealistic regulation in major areas of Santa Rosa for the wetlands and the tiger salamander. The outrageous required 2-to-1 land mitigation for tiger salamander makes industrial and residential land infeasible to develop and hence will reduce the allure to locate in Sonoma County in the future.
Promoting one industry at the cost of others is another blunder by local Sonoma County municipalities. We should have an open forum on the kind of companies we want in all of the communities of the North Bay and what to do to provide the land for planned business centers. Otherwise, the companies will not locate here, and others will eventually locate elsewhere.
We need long-term innovative planning and well-thought-out economic development strategies considering all of the ramifications, not short term decisions by municipal politicians without a full public forum.
The cultural and design trends of commercial buildings in the greater Bay Area tend to hit the North Bay last, but they are coming. Customized workplaces with collaborative areas and clustered common area amenities both within and outside of space will be in increasing demand. Coworking is another one of the fastest growing commercial disrupters, combining design, services and collaboration to facilitate innovation and growth.
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