Posted on: July 4, 2022 Posted by: AKDSEO Comments: 0

The office market in the city limits has been even more difficult, as a number of tenants still haven’t returned all workers from COVID-era remote work, Moffett said.

“Pre-COVID, I did 50 to 80 lease deals a year,” Moffett said. “But I probably have done 30 deals this year, and it’s a mix of sales and leases — some renewals and some smaller offices with one or two rooms.”

Some owners of larger office properties in the business parks near Napa County Airport are considering reverting them back to flex-type spaces, which are industrial properties that can accommodate some office space, Moffett said. That can involve replacing windows in the back of the buildings with roll-up doors for truck access.

“It ends up being expensive flex space,” Moffett said.

Small-tenant leases buoy Marin office market

In Marin County, a string of smaller office leases seems to be amounting to a third straight quarter of net absorption of office space, according to Haden Ongaro, who oversees Newmark’s North Bay operations.

Net absorption is a metric for tracking whether more commercial space is coming off the market via leases and sales than being put back on the market.

Out of 123,000 square feet of total Marin office leasing in the first quarter of this year, net absorption was 55,000 square feet, down slightly from 67,000 square feet in the fourth quarter, Newmark reported. When estimates for the second quarter are completed in mid-July, Ongaro is expecting to see similar improvement as in the past two quarters.

“We’ve done a lot of deals in the last three months for smaller tenants,” Ongaro said. “There’s an increase in activity and actual deals done.”

Active in the market now are companies looking for 1,000 to 3,000 square feet, and some are considering older, class B space, Ongaro said. Law firms are key players in this size range now.

Also out looking are medical-related businesses, and some of those are looking for 8,000 to 10,000 square feet, Ongaro said.

Even with the recent activity, the needle has barely moved on how much office space is available to lease in Marin. Newmark figured the first-quarter availability rate (also called the vacancy rate) was 18.9% of 7.5 million square feet the brokerage tracks in the county. That’s down slightly from 20% at the end of last year but nearly identical to what was on the market a year before.

The trend of short-term renewals from the early months of the pandemic, when economic uncertainty reigned, is continuing, Ongaro said. He pointed to one unnamed national financial firm that just renewed its lease locally for two years and is inking one- to two-year deals across the country, so it can reassess the economy at a later time.

Conversion of some office space into housing continues, Ongaro said. Beyond the announcements about big projects like the reworking of the former Fireman’s Fund campus in Novato and the Northgate Mall in north San Rafael, some developers are in negotiations for options on property while prepping applications to local planning departments for the conversion projects.

Sonoma County: Industrial deals brisk, office leases extended

In Sonoma County to the north along the Highway 101 corridor, Keegan & Coppin Co. Inc. agent James Manley said he already has seen the impact on commercial real estate activity from the Federal Reserve’s mid-June three-quarter-point hike in its prime rate.

“It was kind of like dusting off a cookie with a sandblaster,” Manley said about the Fed action. “Mind you, the cookie needed dusting.”

He had been working with a client on a cash purchase of a southern Sonoma County property. But the effect that the Fed’s move, intended to rein in the highest inflation in four decades, had on financial markets took a big bite out of that buyer’s resources. The deal was heavily dependent on the buyer’s investments, which took a 40% hit in just days.

Like in Marin, a number of Sonoma County office tenants have been seeking short-term lease extensions, Manley said. The office vacancy rate moved up for the third straight period, to 14.6% in the first quarter, according to Keegan & Coppin. That’s barely changed from the level of vacancy in the county since the second half of 2020.

But the market for industrial space, what little of it that’s available in Sonoma and Marin counties remains hot, Manley said.

“I put a small industrial condo on the market two weeks ago, and I’m getting five to 10 calls a day on it,” he said about the 1,500-square-foot space that’s for sale.

The vacancy rate for industrial space in Sonoma County declined for the third straight quarter, down to 6.9% in the first quarter from the peak of 8% in the middle of last year, according to Keegan & Coppin.

Jeff Quackenbush covers wine, construction and real estate. Before coming to the Business Journal in 1999, he wrote for Bay City News Service in San Francisco. Reach him at [email protected] or 707-521-4256.