The call of Santa Rosa as a hub for legalized cannabis commerce is forcing longtime players in Sonoma County industrial real estate to adjust to the rush.
“If you have a business and it is in zoning that allows for cannabis, you may not know if you can renew your lease,” said Shawn Johnson, managing partner of Santa Rosa-based Keegan & Coppin Co. Inc./Oncor International, the North Bay’s largest commercial real estate brokerage. “If you’re trying to buy a building, you may be competing with a cannabis buyer.”
That’s affecting properties not even zoned for cannabis use, he said. Companies not involved in the industry are looking to surrounding cities for space. Some have been considering retirement.
Trouble is, the county’s industrial real estate market already has few options for companies seeking significantly sized space. Just 5 percent of the 24.1 million square feet of industrial space the brokerage tracks in the county was available for lease in the first quarter. That’s half the proportion often considered to reflect a balanced market of enough space for businesses to readily occupy and stabilize rents.
“Some cannabis rents (for industrial space) are higher than office rents; it has flipped,” Johnson said. “But it is not as widespread in the marketplace.”
Metal buildings in Santa Rosa that were selling for $95 a square foot a year ago now are going for $200 a square foot, according to Kevin Foster in Newmark Cornish & Carey’s Santa Rosa office. And tilted-up concrete buildings that were selling at below what it would cost to build them — $100–$200 a square foot — now are priced in the high-$200 range, with some as high as $350. That’s well above sale prices for office space in the county.
Johnson and Foster question how much longer the emerging legal cannabis industry will be able to drive the industrial-space market this hard.
If the legalization of marijuana pushes down prices for related products considerably in the next few years, that might make the high real estate costs incurred now unsustainable then, Foster said.
MARIN LEASE RENEWALS DAMPEN ACTIVITY
The office vacancy rate in Marin has been around 10 percent for nearly three years, according to the latest Cushman & Wakefield figures. In the second quarter, 10.0 percent of 10.8 million square feet of office space in the county was available for lease. Of that, 13.4 percent of the 5.77 million square feet of class A space was available, but just 6.4 percent of 3.67 million square feet of class B space.That’s little-changed from a year before, when vacancy was 9.6 percent overall, 12.2 percent for class A and 7.4 percent for class B.
“If you look at the velocity of the activity level, it is certainly slower than last year,” said Steven Leonard, based in Cushman & Wakefield’s San Rafael office.
One metric of market activity is net absorption, or how much more or less space is left after leases, subleases, vacancies, sales or construction. Net absorption was 36,000 square feet in the red since the second quarter of 2016, according to Cushman & Wakefield.
The rents owners of Marin office properties north of San Rafael owners are seeking have plateaued, Leonard said. The average full-service monthly asking rent for the county was $2.99 per square foot in the second quarter, unchanged since fall and 6 cents higher than a year before.
An internal brokerage survey suggests Marin’s tepid office leasing now may be happenstance of lease-expiration dates, Leonard said.
“There haven’t been that many this year,” he said. “There were a lot last year, and there will be a lot next year. I do not think it’s from a slowdown in the economy.”
That lease-renewal cycles are having such an influence the Marin office market may suggest that much of the activity is coming from more from local companies than from new employers, Leonard said.
That said, there are some firms from outside the area scoping Marin buildings for 10,000–20,000 square feet, he said.
“That’s pretty sizable for Marin,” Leonard said.
Sizable recent Marin leases have come at the beginning of this year, with occupancies this summer. One is Marin Community Foundation’s lease renewal and expansion of its footprint in the Hamilton Landing development in Novato to 36,000 square feet. And in the same development, Buck Institute for Education is relocating to 7,200 square feet from elsewhere in the city.
SONOMA OFFICE VACANCY FALLS
Sonoma County has 13.1 million square feet of office space, by Cushman & Wakefield’s estimates or 14.4 million square feet per Keegan & Coppin Co. Inc./Oncor International, the dominant brokerage in the market. Keegan & Coppin figures for the second quarter weren’t available by press time.
While Marin’s space is predominantly class A, Sonoma’s is mostly class B, accounting for 9.67 million square feet of the total, according to Cushman & Wakefield.