Last year at this time leasing was beginning to slow. Now, for major requirements outside of a few industrial, government and healthcare companies looking for space, the market has slowed considerably. Companies are taking safe, secure positions and staying where they are, one to see any signs of economic life, and two to see if rents might be cheaper 6 months from now. Many companies will probably be back in the market when they see signs of solving the financial sector debacle.
The retail sector is experiencing the most challenges with reducing rents and higher vacancies. Retail rents rose the most in the last 8 years and therefore will drop the most during the downturn. Retail vacancies have risen 1.5% in the last year and will rise further this year.
Office vacancies in the Santa Rosa submarkets are running 14-15% which is not too high, providing many opportunities for tenants willing to stretch a little now to make good deals. The southern Sonoma submarkets have the largest vacancy of 27-30% owing to the overhang of telecom valley which has been gradually consolidating elsewhere.
The industrial vacancy is a very healthy 13-14% in most submarkets and is reflective of a slowing supply side. Companies with long range strategic plans should review the opportunities, both existing space and build-to-suits, to make moves ahead of the market turnaround.
The market will turn around and it will turn quickly and companies will be competing again with each other over the existing prime space or remaining land to build facilities.
Industrial is the most constricted supply as most business park land has been planned for office or highly improved buildings. This will move land intensive industries further north to Ukiah and east to Solano County.
Many future engines of the economy are beginning to emerge.
Alternative energy and energy efficient industrial sectors will emerge over the next decade.
Bio-engineering and particularly vascular will become a cluster as well as stem cell research and processing with the grants enjoyed by The Buck Foundation in Novato inspiring start ups.
These are the major clusters along with an array of intellectual capital based emerging companies.
These tech and professional sectors, along with the wine industry, will move the economy ahead in the next decade. We are optimistic about the variety of economic engines distributed throughout the Northbay.
In general, space is not overbuilt as much as unplanned for flexible uses. Much of the office vacancy is in southern Sonoma County and is very specialized office buildings designed for telecom headquarters where single story flex buildings may be the most in demand in the near future with the coming of the Green Industry. Building conversions and modifications may offset this to some degree.
We remain positive about the Northbay's prospects given the diversity of industry clusters including agriculture, wine, viticulture, tourism and a large intellectual/wealth capital base.
Typically an economic slowdown does not affect the Northbay as much as the state or the nation and the nucleus of entrepreneurial talent living in Tiburon to Healdsburg will continue to invest in or grow new companies.