Sonoma County vacancy rates drop

Empty offices are becoming harder to find in Sonoma County, where vacancies have dropped to their lowest level in 2 1/2 years, a sign that businesses are expanding.

While ample space is still available, particularly in older buildings and areas with higher vacancies, commercial brokers report a steady increase in leasing activity. If demand continues to pick up, more new construction could follow next year.

“We’re seeing stronger activity than I’ve seen in awhile. The market certainly appears to have stabilized,” said Paul Schwartz, senior vice president for Colliers International in Santa Rosa.

Nineteen percent of the office space in Sonoma County was vacant in the second quarter, down from 21.9 percent a year ago. It was the first time vacancies have fallen below 20 percent since the winter of 2004, according to the latest market survey by Keegan & Coppin Co., the county’s largest commercial real estate broker.

Far less space can be found in the industrial and retail sectors. Retail space is tight, with a vacancy rate of 3.5 percent. Industrial vacancies are running at 10.4 percent, according to the survey. Landlords typically seek an 8 to 10 percent vacancy rate.

Demand for office space increased in Santa Rosa, Rohnert Park and the airport area, with vacancies only rising in Petaluma.

Financial and business services, high-tech and software startups, and medical device companies are driving demand for office space. Most are homegrown firms.

“It’s a little bit better in terms of people calling to look at space,” said Joan Woodard, co-owner of Simon & Woodard, a developer and manager of office buildings in the county.

So far, office rents have not gone up significantly. The local office market has been slow to recover from the tech bust, which sent the county into recession in 2001. As the economy began to improve, demand for large industrial and warehouse space began to pick up in 2005, and now more offices are filling up.

“You’re going to see some more improvement in the numbers,” Schwartz said.

The greatest demand is for newer buildings. Tenants will pay higher rents so they can design interior spaces to specific needs and benefit from more efficient energy systems and other features.

Vacancies now range between 10 and 12 percent for such Class A space compared with more than 20 percent for Class B space, said Scott Stranzl, vice president for Basin Street Properties.

Basin Street Properties, for instance, is finding strong interest for its new Harvest Business Center building near Charles M. Schulz-Sonoma County Airport. Two leases are in the works after an engineering firm moved in earlier this year. The three tenants will occupy about 80 percent of the 44,000-square-foot building, Stranzl said.

Basin Street eventually will put up two more buildings to complete Harvest Business Center. But leasing activity dictates the pace of construction as the commercial real estate market continues to slowly bounce back.

“It’s continuing to improve,” Stranzl said. “There’s not a lot of new buildings coming out of the ground. That helps to stabilize occupancies and rents.”

Sonoma County rarely has a glut of commercial space primarily because many of the properties are owned by smaller investors who can’t afford to have buildings sitting mostly vacant.

“One thing good about the Sonoma market is we don’t have real big upswings and real big troughs,” Woodard said.

The outlook for commercial real estate should continue to strengthen even as business growth slows, according to a Moody’s Economy.com report on the county’s construction industry.

“Demand for office space appears to be rapidly improving, but given that the office market is the most oversupplied at the moment, it could be 2009 before absorption reaches the point of generating a significant amount of new office construction. Industrial construction will likely improve sooner due to lower vacancies and the turnaround in this industry’s labor market,” economist Steve Cochrane wrote in the report.

Contributing to that growth could be companies expanding into Sonoma County if economic growth in other regions of the Bay Area makes make the county a more affordable alternative.

You can reach Staff Writer Michael Coit at 521-5470 or e-mail mike.coit@pressdemocrat.com.