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Office, industrial sales slip in first half

APARTMENT OCCUPANCY AND CAP RATES UP, OFFICE VACANCIES HOLD STEADY

NORTH BAY – Troubles in national credit markets slackened investment sales of Highway 101 corridor commercial real estate in the first half of 2008 after several strong years.

Sales of office and industrial properties in the largest cities of Sonoma County slumped to $52 million for the first six months of this year, compared with $71 million for the first half of 2007 and $120 million during the same time in 2006, according to NAI BT Commercial analysis of sales reported in the Business Journal and real estate information services CoStar and Real Quest.

The brokerage found a similar trend in Marin County. First half of the year sales amounted to $35 million, a steep decrease from $477 million in the same period last year and $95 million in the first six months of 2006. The large figure for last year includes American Financial Realty Trust’s $213 million acquisition of the three-building Fireman’s Fund Insurance Co. campus in Novato.

The sales volume decreased largely because conduits for Wall Street money on large deals are not as open as they had been, and investors have to use more of their own capital to fund purchases, according to Whitney Strotz of NAI BT Commercial.

“Deals that are transacting are more cash-based compared to traditional use of leverage,” Mr. Strotz said.

Some commercial real estate lenders are calling for down payments of 30 percent to 40 percent, instead of 25 percent a few years ago, according to Bill McCubbin, president and CEO of Orion Partners.

“Considering that interest rates picked up a bit from the heyday a few years ago, these are all factors that slow the market down,” Mr. McCubbin said.

One worry is that upward movement in interest rates combined with tepid or stagnant growth in rents will lead to lower property values and discourage some owners from marketing their properties, according to Mr. McCubbin.

Sales of multifamily properties also have been slow, not only in the North Bay but also in the entire Bay Area, according to Marcus & Millichap. The brokerage has noted a quarter fewer closings on apartment complexes so far this year compared with last year.

Unlike in the office market, where rents have not increased much or have eased in recent months because of vacancies, foreclosures and tighter lending practices have made homeowners into renters, boosting occupancy rates and rents in apartment buildings, according to Marcus & Millichap.

Apartment property investors also are facing tougher lender requirements and have been holding out for lower asking prices, according to Andrew Lesher of Marcus & Millichap. For example, in the past two months he sold a 33-unit complex at 2066 Mendocino Ave. called The Garden Apartments for $3.67 million and a 20-unit building on Olaf in Cotati for $2.7 million.

“The deals were listed last year at much lower cap rates, and sellers’ expectations were reflective in what had been going on in the last couple of years,” Mr. Lesher said.

The capitalization rate – net operating income divided by sale price – for The Garden was 5 percent last year and increased to 5.75 percent when the price was lowered and garnered the buyer’s interest. The Cotati property was listed at a capitalization rate of 5 percent last year and sold on the fourth escrow at a rate of 6 percent.

Occupancies may be increasing in the apartment market, but major owners of North Bay office properties are increasingly eager to make deals to keep and attract tenants.

Equity Office, a unit of Blackstone Realty that owns roughly a third of the class A office space in the Highway 101 corridor, has taken an usual step for the company of having three different brokerages market the space rather than handling marketing mostly in-house.

Sonoma County vacancy rates linger at 18.5 percent and 24.7 percent, according to preliminary second-quarter figures from Orion and NAI BT, respectively.

For Marin County, the office vacancy rate edged up from 16.8 percent in the first quarter to 17.4 percent in the second quarter, according to Orion’s initial estimate, and was basically unchanged at 13.2 percent, per NAI BT’s figuring.

In the business parks around Napa County Airport, the market for light-industrial and warehouse space remains much as it was at the end of the first quarter, with 3.2 percent of nearly 10 million square feet of buildings available for lease, according to Chris Neeb of Cushman & Wakefield.

“We’re seeing continued growth in the wine industry, with wineries looking for storage opportunities in the airport area, and so are industry suppliers,” Mr. Neeb said.

He pointed to Darioush Winery’s newly inked lease of 10,000 square feet of hard-to-find barrel storage space at 831 Latour Court in south Napa.

Stravinsky Development of Madera is set to complete its 411,000-square-foot wine warehouse in the Green Island industrial area of American Canyon this fall and has two potential tenants seeking all of the building.

Cushman & Wakefield is marketing a three-building, 370,000-square-foot proposed development called Greenwood Commerce Center. Sacramento-area developers Sierra View Construction and The Pigman Cos. are seeking entitlements to build 20,000-, 119,000- and 230,000-square-foot buildings on 18 acres south of Napa Valley Gateway Business Park purchased from the Gunn estate earlier this year.

Inside Napa’s city limits, the office vacancy rate is estimated to be 13 percent to 15 percent with the addition of new projects Main Street West, The Riverfront and Napa Square as well as vacancies left by shuttered residential real estate-related businesses, according to Michael Moffett of Coldwell Banker Commercial Brokers of the Valley.

About 5 percent to 10 percent of the available industrial space inside the city is centralized around Tannery Row, according to Mr. Moffett.

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