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Marin commercial property sales sapped by interest rate hikes

Marin commercial property sales sapped by interest rate hikes

Commercial real estate sales in Marin County have picked up considerably since the dog days of the pandemic, but agents say rising interest rates have slowed fourth-quarter volume.

“The Federal Reserve Board is trying to kill the market and it’s succeeding pretty well,” said Cesare Cecchin of Meridian Commercial in San Rafael. “The transaction volume is down about 72% for the quarter.”

Cecchin said interest rates were cut in half after the COVID-19 pandemic began in 2020, which helped maintain commercial real estate prices.

“Now we’re paying for it,” he said, referring to the Federal Reserve’s series of interest rates hikes aimed at slowing raging inflation.

Before the Fed slammed on the brakes, commercial sales in Marin had been improving. Cecchin tracks data on 3,709 commercial buildings in Marin, Sonoma, Napa and Solano counties. He said sales in the third quarter of 2022 for the commercial properties he tracks amounted to more than $129 million, compared to $37.6 million in the third quarter of 2020.

Haden Ongaro, executive vice president of the Newmark Knight Frank real estate firm, said, “Buyers are certainly taking into account rising interest rates. Interest in buying has slowed because people are uncertain where interest rates are going.”

Ongaro said commercial loans have increased from the 4% range to the 5.5% range.

“That’s a huge difference,” he said.

According to Newmark’s most recent report on the Marin office market, the vacancy rate was 18.4% at the end of the third quarter ending in September, down from 20.7% at the end of the third quarter of 2021. Newmark reported a net absorption rate of 45,137 square feet for the third quarter and 77,496 square feet for the first nine months of 2022.

Net absorption is the amount of occupied space at the end of a period minus the amount of space occupied at the beginning of the same period.

Asking rents for office space in the third quarter of this year were $3.38 per square foot, down from $3.70 per square foot a year ago, according to Newmark.

But Nigel Hughes, a market analyst for CoStar Group, said the vacancy rate for office space in Marin shot back up over 19% in the fourth quarter of 2022. Hughes noted that 115,514 square feet of office space was added to the market during the quarter because of Autodesk’s decision to vacate its San Rafael headquarters in October.

Hughes said it appears that many employers are sticking with a hybrid working model, bringing some employees back to the office but allowing others to continue to work from home.

When Autodesk closed its office, spokeswoman Mary Garofalo said the company had “ramped up” a new workplace model that divides employees into three groups: office based, hybrid or home based.

“The majority of our global team falls within the hybrid category, meaning they split their time between their homes and local, commutable Autodesk offices,” Garofalo said.

Hughes said at one time there was speculation that communities such as Marin would benefit from San Francisco companies opening smaller offices in suburban areas.

“But that doesn’t seem to be happening,” he said. “And on top of the hybrid working, now there is this threat of recession and uncertainty around that. So it’s another blow to the office market.”

Hughes said that the vacancy rate for retail space in Marin was 3.6% in the third quarter of this year, down a bit from 3.8% in the third quarter of 2021 and 4% in the third quarter of 2020.

Hughes said brick-and-mortar stores benefited from a flurry of spending that followed the relaxing of COVID-19 restrictions and the distribution of federal stimulus funds. But he said the long-term trend away from brick-and-mortar stores to online shopping hasn’t gone away.

“It is still going to be a struggle for some brick-and mortar-retail,” Hughes said, “particularly if there is a recession next year.”

Both Cecchin and Ongaro said the bulk of the demand in Marin lately, whether for office or retail space, has been for high-end space. For example, Cecchin noted that within the last 90 days the Strawberry Village shopping center in Mill Valley sold for $167 million, which amounts to $952 per square foot.

“The A product is getting the best rents and has the lowest vacancies,” Cecchin said. “Anything below that we’re getting high vacancy in. North San Rafael and Novato C class buildings are having a hard time keeping occupancy up.”

Newmark’s third-quarter report on the Marin office market says, “Class A vacancy went down 70 basis points from the second quarter of 2022, while Class B vacancy increased by 100 basis points.”

“This disparity between Class A and Class B space,” the report said, “is indicative of companies seeking quality space with amenities in an effort to incentivize employees to come back to the office.”

A vacancy at an office building in Sausalito, Calif., on Thursday, Oct. 8, 2020. (Alan Dep/Marin Independent Journal)
A vacancy at an office building in Sausalito, Calif., on Thursday, Oct. 8, 2020. (Alan Dep/Marin Independent Journal)

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