Vacant offices, stores slowly finding new life
Published: Sunday, April 22, 2012 at 4:15 a.m.
Last Modified: Sunday, April 22, 2012 at 8:41 a.m.
Almost a quarter of Sonoma County's offices and storefronts are still empty, but local brokers and property owners say the commercial real estate market is slowly improving.
The county vacancy rate climbed to nearly 24 percent in the first quarter, 1 percent higher than a year earlier, according to Keegan & Coppin, the North Bay's largest commercial real estate company.
Today's vacancy rate is essentially back where it was two years ago, a time when Keegan & Coppin President Al Coppin said both the commercial market and the economy were “bouncing along the bottom.”
Despite the lack of overall progress, Coppin and others said they're seeing more companies signing leases or buying their own office buildings. The gains, however, have been offset by the departure of some larger companies, most prominently State Farm Insurance, which closed its doors in Rohnert Park last summer.
Matt White, president and CEO of Basin Street Properties, a Reno development firm with long ties in Petaluma, said the market is going through “a bumpy, uneven recovery.”
“It's generally moving forward,” White said. “It's just not moving forward at the pace you would expect in a recovery.”
The commercial real estate market has long been a barometer of the health of the county economy. And what moves it forward is job creation at both new and existing businesses.
The market was booming in 2005 when Chicago-based Equity Office Properties Trust became the county's largest commercial landlord. The company paid Basin Street $263 million for 1.43 million square feet of North Bay office properties — a price amounting to nearly $184 per square foot.
But in the aftermath of the Great Recession, much of that space sat empty and Equity Office was unable to keep the properties. Basin Street bought back eight buildings in Petaluma last summer for 28 cents on the dollar.
When Basin Street took over the buildings, White said, they were 70 percent vacant. Today they are 70 percent occupied, partly due to the sale of two of them.
The county vacancy rate can be very deceiving, he said, because it doesn't distinguish between old, functionally obsolete buildings and more-modern properties.
“The quality stuff is starting to lease,” White said.
Barry Palma, senior vice president at Cornish & Carey Commercial in Santa Rosa, said a vacancy rate of about 10 percent would be more balanced between owners and tenants. As such, the abundance of vacant offices today still favors those seeking space.
“We have to work through that supply,” Palma said. “We're gradually working through that supply.”
The county's job growth is expected to stay at about 1 percent this year, and economic growth will be less than 3 percent, said Eduardo Martinez, a senior economist who studies the county for Moody's Analytics in West Chester, Pa.
Today is a great time to buy commercial office space, Martinez said, and the economy is expected to improve in future years. But he predicted the road to recovery will be “a long haul.”
“It's a pretty big hole that you're still getting out of,” he said.
Even so, observers are seeing signs of life.
Exchange Bank officials, in releasing their first-quarter financial results last week, named commercial real estate as one of the segments of the economy that has shown an increase in activity.
Similarly, Coppin said he sees community banks making more loans for commercial property than a year ago. And more businesses are taking advantage of lower prices to purchase properties.
The buyers, Coppin said, are “realizing this is sort of the trough of the market.”
Basin Street hasn't been alone in purchases of distressed or vacant property in the south county.
In 2010, San Mateo-based Cornerstone Properties acquired the 170,000-square-foot former Cisco Systems campus in Petaluma.
And last month Napa-based PB&J Acquisitions and Investcorp, which trades on the Bahraini stock market, combined to pay $65 million for nearly 841,000 square feet of office space in Petaluma and Rohnert Park. The portfolio was about 74 percent occupied at purchase.
Tony Sarno, a director with Cushman and Wakefield in San Rafael, said the purchases have been the big development in the Petaluma market in the past two years. Since then, space has been leased there by such diverse companies as digital lock maker Digilock, camera bag maker Lowepro, solar startup Enphase, First California Mortgage and laser startup Raydiance.
The big property owners still “have their work cut out” to fill the buildings, Sarno said. However, “at the pricing they got them at, they're going to be able to do that.”
Among the major recent leases in Santa Rosa is 19,000 square feet of space that Sutter Pacific Medical Foundation will move into this summer at the Landmark Executive Center on Airway Drive.
The foundation will invest $13 million in improvements and equipment there. That includes lining the walls, ceiling and floor with copper foil for an MRI unit in a new, state-of-the-art diagnostic imaging center. The new space also will house doctor's offices and other services for cancer and dermatology patients.
Sutter Pacific already has 46,000 square feet at the Landmark building, just one of 19 locations in the county that totaled 148,000 patient visits last year, up 3 percent from 2010.
And when Sutter's new $284 million hospital opens near the Wells Fargo Center in the fall of 2014, the foundation plans to have ready a nearby 80,000-square-foot medical office building for some of Sutter Group of the Redwoods' 119 physicians and clinicians.
“We're growing,” said John Ray, the foundation's chief operating officer. “We're adding new physicians.”
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