Santa Rosa office market steady as employers adjust post-COVID plans

Over the past 24 months, office space utilization has likely been at an all-time low as employers transitioned to remote working during the pandemic.

While utilization was low, the Santa Rosa market held steady in terms of vacancy. This is demonstrated by the vacancy rate of 12.7% in the fourth quarter of 2021, compared to 11.6% in the fourth quarter of 2020. Although this represents a vacancy increase of 90 basis points and a negative absorption of approximately 68,000 square feet, it should be noted that Santa Rosa North Corridor office vacancy decreased by 1 percentage point over the same period. It was a positive absorption of 23,000 square feet.

The Sonoma County airport area includes much of the North Corridor submarket, and its vacancy rate is closely tied to that of downtown Santa Rosa.

As COVID numbers have declined and masking requirements have been relaxed, we are seeing more and more employees returning to the office.

However, it seems that the lessons learned and the hybrid work infrastructure that has been put in place over the past few years may have changed the future of office space usage. Employers seem more open to the idea of ​​hybrid working and employees seem to have embraced the flexibility offered by a hybrid strategy.

The office remains a central part of the equation, but we’re starting to hear more and more companies questioning the amount of space they’ve given to the number of employees using the space. This could definitely have a negative impact on our vacancy rates, as companies get the “right size” based on how many employees come into the office each day. Sublease vacancy remains an insignificant part of current vacancy, but many companies are adjusting their requirements as their leases expire.

The demand for office space has been somewhat mixed depending on the location and the quality of the building. The highest quality buildings in the Stony Point Road and Fountaingrove Parkway areas saw fairly strong demand, while many buildings in outlying or downtown areas struggled to find tenants.

We are currently seeing Class A office buildings in the best locations with rents of $2.25 to $2.40 per square foot fully serviced. Class A rents outside of the most desirable areas are between $1.90 and $1.95 full service.

Office rents in older buildings range between $1.75 and $1.85 per square foot. These rates are roughly in line with where they were at the end of 2019 before the roughly 5-10% decline we’ve seen through 2020 to 2021.

Rental incentives have been reduced from 2020-21 levels but remain achievable, depending on the situation. Construction costs for leasehold improvements continue to rise each year well beyond the increase in rental rates. This squeezes net income from investment properties.

Thus, some landlords are beginning to offer improvement allowances to cover part of the improvements, with the tenant having to assume the balance in relation to the delivery of spaces with “turnkey” improvements, which has been the norm over the years. of recent years.

Owner-user demand has slowed slightly over the past 12 months. Prices held steady, but building inventory, particularly those in the 1,500 to 3,000 square foot range, increased. The SBA and bank rates remain at historically low levels, which has kept prices level for the past few years.

I think the drop in demand is fueled by uncertainty about the future of office work. In most cases, buying remains the best option for businesses to fix their occupancy costs, resulting in long-term savings, especially after tax considerations are taken into account.

Dave Peterson (707-528-1400, [email protected]) is a senior partner at Keegan & Coppin Co. Inc. in the Santa Rosa office.

Jose C. Birney