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Saturday, February 04, 2012
Regional Focus: February 2009
Sinking Ship?
The rise of office vacancies in South Placer
Story by Christine Stanley
It’s a buyer’s market everywhere, especially in South Placer where the fallout from the housing market has left dozens of vacant office buildings in Rocklin and Roseville. Many are the result of mortgage and title company implosions, which a short drive down Douglas Boulevard can confirm, but real estate pundits say it’s going to take more than an economic turnaround to recover and move forward.
As of December, Cornish & Carey Commercial tracked 245 office buildings in Roseville and 87 in Rocklin, though not necessarily all have space available. That said, Roseville’s 20.42 percent vacancy rate has nowhere to go but down: Developers are building more than 121,850 square feet of new commercial space for the market, according to Cornish.
Rocklin, the area’s ground zero for the homebuilding and financing freeze, has a 44.7 percent office vacancy rate, by far the highest in the region. You would be hard pressed to find a higher vacancy rate anywhere else in the state, according to John Frisch, managing partner for Cornish. Meanwhile there’s new space on the way — more than 81,000 square feet are under construction.
South Placer’s hubs were hard hit by building and finance degeneration and, on the industrial side, pummeled by the domino effect that buried subcontractors.
“Sheetrock, insulation, roofing, plumbing — they all took a hit,” Frisch says. “It’s a very extensive food chain.”
Unfortunately, Rocklin’s underbelly isn’t reflecting vacant shadow and sublease space. Available subleases aren’t considered vacant, so the number of empty offices is really much higher.
“It’s the areas that were the hottest four years ago that are hurting the most now: Lincoln [and] Elk Grove. It was a meteoric rise unfortunately built on fundamentals that couldn’t last,” Frisch says.
Following Alliance Title Co.’s Chapter 7 bankruptcy liquidation filing in June, the company closed five Roseville locations, three of which were on Douglas Boulevard; one in Rocklin and another in Auburn. Likewise, Alliance’s sister company, Financial Title Co., also closed three offices in South Placer with the failure of its Colorado parent company Mercury Cos.
Then, in September, after its banking assets were sold to J.P. Morgan Chase Bank, Washington Mutual Inc. began closing local doors and freeing up space. Howard Hughes, who represents the WaMu properties through Hines Interests LP, would not comment on the number of properties or amount of space made available by the bank locally.
Local development company Kobra Properties has also taken a turn for the worse. In December the company filed for Chapter 11 bankruptcy as the result of owing $390 million on more than 80 properties and developments. As a result, the company, which owns more than 3 million square feet of commercial real estate, will now unload 16 troubled properties, at least five of which are located in South Placer.
“It’s better to lead the market down than follow it down.”
— John Frisch, managing partner, Cornish & Carey Commercial
Others have been closing some, if not all local doors: Countrywide Financial Corp., which was bought by Bank of America Corp. in July; Chicago Title Co.; Lennar Corp.; Centex Homes, the area’s largest homebuilder; and Beazer Homes USA Inc., the second-largest homebuilder in the Sacramento region.
“For some, it’s not even downsizing. At this point they’re just trying to get out of the market,” says Tom Bacci, senior vice president at Grubb & Ellis Co. in Roseville.
Sacramento County’s commercial development never rose as high and bright as South Placer. Now it has lower vacancy rates, according to Grubb & Ellis, at about 17 percent.
“They were much more reliant on the government — the kinds of jobs that don’t go through wild fluctuations and don’t disappear in a tough economy,” Frisch says. “It’s almost the opposite of what South Placer was.”
According to the third quarter market report from Grubb & Ellis, the state has picked up leases for more than a million square feet of new space this year.
Now, local market experts are chanting the market’s fight song as if willing the economic activity to change its tune. Most project the turn around to begin next summer, but now that major corporate players have bowed out of the local market, an upswing in lending appetites is only half the puzzle.
“For some, it’s not even downsizing.
At this point they’re just trying to get out of the market.”
— Tom Bacci, senior vice president, Grubb & Ellis Co.
“The thing that gets really hard is that when you have a marketplace that caters to small business, if you have a 40,000-square-foot space that can’t be broken up, it’s hard for the little guys to make use of that,” says Bob Kuhl, a Tri Commercial principal. “There are very large numbers because there are very large spaces. Some of these will probably never get leased.”
South Placer has never been known for large floor plate users, Bacci says, and now that so many large spaces are available, the market is more or less stuck with them. The state, which is in constant need of space, is of no help because it needs to maintain proximity to downtown Sacramento.
It’s going to take some creativity from the landlords and space planners to redesign large spaces, according to Bacci, who says that much of the available space doesn’t make sense to rearrange. But how long can building owners afford to wait?
“They will end up dividing the space and leasing it in 2,000-square-foot and 5,000-square-foot pieces,” Frisch says. Generally speaking, landlords can get higher prices for smaller spaces, but that’s offset by the fact that it’s more expensive to improve a small space than a large space. It’s economy of scale.
“If they’re smart, they won’t be too stubborn. It’s better to lead the market down than follow it down,” he says.
Meanwhile, Kuhl says, the businesses with nice space and appropriate sizes are getting battered because tenants are pushing the envelope and demanding rents that often dip 50 cents per square foot below market value. As such, landlords and owners are finding themselves in somewhat of a Catch-22. They’re getting lowballed by tenants while offering lease-hungry incentives.
“I saw one this morning for half rent the first year,” Frisch says. “There’s increased tenant improvement allowances: A typical figure is $35 per square foot, and now they’ll give you free rent and $50 a square foot.”
For lessees, deals are easy to come by. Parkway Corporate Plaza on East Roseville Parkway is a 300,000-square-foot office park with four buildings. The agent for the properties is Bacci, who says there is currently 70,000 square feet available at an introductory rate of about $1.50 per square foot. When the market was hot, it was going for $2.15. “It’s upset some of the other landlords because they think we’re killing the market,” he says.
Still, as the old adage goes, location is key. Stone Point Corporate Center on Rocky Ridge Drive at Stone Point Drive is holding strong. The property, where Morgan Stanley remains a 26,000-square-foot tenant, is maintaining lease rates at $2.55 to $2.60 per square foot.
Rocklin 65 Corporate Center is a 24-building office park with seven buildings available that have never been occupied. Owner-user sales range from 3,500 square feet to 56,000 square feet at $180 to $230 per square foot or for lease rates from $1.90 to $2.15 — about 5 to 10 percent under market value according to Bacci.
But even with such rates and opportunities, Kuhl says tenants and landlords need to meet in the middle.
“The tenant comes in and makes an offer that just buries the landlord, but the landlord is probably going to get even in the future, so it’s prudent to get a fair deal. Most of the tenants I’m dealing with are trying to make a decision that’s good for them over the next three to five years,” Kuhl says. “It’s got to be a symbiotic relationship, and we’re not having one right now.”
And while some industry experts are advertising second quarter 2009 as the market’s estimated turnaround time, a few upticks in property values, consumer confidence and loan offers will likely not be enough to stop South Placer’s fall from grace.
Now that the big players are out of the market, there’s no one else to take their place.
“South Placer is still a very desirable place. They’ve got good schools, good communities,” Frisch says. “Their economy was, in the last 10 years, built on homebuilding and the mortgage business. They had [Hewlett-Packard], but those jobs went away. What they lack more than anything is a major employer.”
Without it, he says, the road to recovery will be a long one.
For medicinal purposes
South Placer is knee-deep in vacant office space, but at least one submarket is staying healthy: medical.
Healthcare space in the Sacramento region is stronger than traditional office, says Cornish & Carey Commercial’s Sue Nelson, who sees development and demand increasing in Rocklin, Lincoln and Roseville. “The highest prices I have seen are over $3 per square foot for full service near Sutter Roseville. And we see rates that are anywhere from $1.50 to $2.50, depending on the location of the property, its age, etc.”
The need for medical space shouldn’t surprise anyone because some of the region’s largest nongovernment employers are hospitals. With a growing base of baby boomers, medical care providers are a hot commodity.
Medical space requires extra attention, and as such, development and pricing can differ from that of a commercial space of similar size and locale.
“There is typically about a 10 percent added cost for medical office space due to the increased parking requirements,” Nelson says. Not every office property is zoned directly for medical use, and restrictions apply. For example, in Roseville, the parking requirements at a medical office are seven spaces per 1,000 square feet of space, whereas commercial office spaces require just four per 1,000.
“And No. 2, there is more wear and tear on the building because more people are going in and out,” Nelson says. “So building owners try to factor that in.”
— Christine Stanley
photographer Ryan Salm
