The Outer Circle

Is suburban office space a tough sell?

Back By Christine Calvin

Think Sacramento’s plan for a sports arena and triple land-swap sounds complicated? It’s peanuts compared to what commercial real estate brokers are going through to gain and maintain tenants in suburban office properties these days.

The economic downturn left a cache of premium office space up for grabs in central business districts across the Capital Region and a glut of available space in suburban markets. As a result, building owners and commercial brokers representing office properties in Roseville, Rocklin, Natomas and beyond are working tirelessly to rehab, repurpose and rebrand those properties in a competitive market.

“During the boom, the biggest factor was availability. People would look at the suburban markets for rent, which was often cheaper; buildings were often newer and had more amenities. Now, in the central business district, the vacancies are a lot higher and rents have come down,” says Gretchen Tobin, commercial development manager for Mourier Land Investment Corp. “One of the biggest things we have to do is educate brokers and tenants about our properties … half the battle is getting people to come look at our buildings.”

Tobin says she and other property owners in the South Natomas, Roseville and Rocklin markets are now seeing just a third of the leasing activity they experienced in the busy years of the real estate boom. And even then, once potential tenants have been identified, getting them to sign on and stay put is a beast of a burden.

Take 1075 Creekside Ridge, for example. It’s an office building by the Roseville Galleria where, for the past several years, Adventist Health, Agilent Technologies Inc. and Countrywide Home Loans were all large tenants. Jon Walker, senior vice president at Grubb & Ellis Co. is the broker for that property, and he says keeping tenants in the space over the past 18 months has gone something like this:

“The market collapsed, and [Countrywide] sublet to Asset Financial. Then, [Bank of America] purchased Countrywide, and they assumed the master lease. In the meantime, Agilent’s lease was due to expire, so we worked out an early buyout to get [York Insurance Services Group] into half of the building since they needed to consolidate three different locations into one. Once that was complete, Adventist said they needed Asset Financial’s suite. This involved a buyout and early termination of their sublease with BofA, plus a termination of the master lease that BofA had â?¨with the landlord, plus a blend-and-extend lease for all of Adventist’s space in the building.”

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The game of musical office space resulted in more than a hundred hours of negotiations with attorneys from all sides, countless conference calls, meetings, tours and document redrafts, Walker says.  

“Remember, we don’t make a dime until the deal is fully executed, and sometimes these deals take nine to 12 months to put together,” he says.

That wasn’t always the case.

“Landlords have finally waved the white flag and said, ‘I give up; I want to fill this building. What do I have to do?’ So it’s really in the past six months that you’re seeing them cut some really great deals.”

Jon Walker, senior vice president, Grubb & Ellis Co.

The transaction process for commercial leases is taking two to ¨three times longer than it typically would in a “normal” year. During the boom times, brokers and tenants could come to terms within a proposal, a counterproposal and maybe one more, says Tobin. Now, it’s not uncommon to have transactions going back and forth â?¨a half a dozen times, taking six to 12 months to close.

“When the market was hot, tenants were more worried about getting the space they wanted. Whereas now, they have a lot of options, and they have a lot of landlords chasing them so they are also likely to be getting unsolicited offers,” Tobin says. Following the economic collapse, “people were really afraid to make a mistake or afraid that they were going to gauge something wrong. There was a lot of hesitancy. But I feel like that has eased up a bit now that confidence in the economy is bouncing back.

To lure tenants away from central business districts and into the suburbs, building owners, brokers and landlords alike are pulling out all the stops.

“Landlords have finally waved the white flag and said, ‘I give up; I want to fill this building. What do I have to do?’ So it’s really in the past six months that you’re seeing them cut some really great deals,” Walker says.

As landlords lower rates, Walker and hoards of other brokers are trying to sweeten deals with just about any incentives they can muster.

“If you are going to get a tenant to move, it’s really going to take some effort. You’ve got to improve [the tenant’s] economic situation by lowering his rate and paying for his move; the landlord has to soften that cost. It might also mean free rent,” Walker says. â?¨“The overall economic package has to be attractive.”

Keeping suburban properties competitive means maintenance projects and upgrades can’t be put off any longer.

Metro Center Office Park in South Natomas is a four-building campus built in 1988. It was showing its age and losing deals to newer, more attractive buildings. “So we went to the owner and said, ‘Look, if you want to go head to head, you have to be updated. You have to spend some money if you want to move this space,’” Walker says.

So the property owners redecorated, retiled and dressed the place up with new landscaping and water features, among other additions. The remodel was extensive — and expensive.

“But at the end of the day you have to do it. We now have more tours and more interest, so it’s a good thing,” Walker says.

Meanwhile Mourier Land Investment Co. is looking for ways to beef up amenities in its Roseville and â?¨Natomas buildings, including adding fitness rooms, conference centers, food services and free Wi-Fi in the â?¨main lobbies.

“We are really trying to figure out how to make our properties more appealing,” Tobin says. And if lipstick and glue aren’t enough to get vacant spaces filled, you can always do what Jon Walker, Elaine Hartin and countless other brokers have done: rebrand the entire property.

Hartin, senior vice president of Cornish & Carey Commercial Newmark Knight Frank’s office division, represents six properties owned by Twin Trees Land Co. in Roseville, Rancho Cordova and South Natomas.

“A lot of landlords have had to take these buildings and retrofit them to a more traditional environment. It’s been an amazing morphing of space.”

Elaine Hartin, office division senior vice president, Cornish & Carey Commercial Newmark Knight Frank

“We have completely rebranded the buildings. There are two buildings on Douglas Boulevard — about 40,000 square feet each — and in the past year alone the owner has put more than $3 million into the buildings, making them the only LEED gold certified existing buildings in all of Roseville,” she says.

The Roseville overhauls included extensive changes to landscaping and exterior lighting, repaving of the entire parking lot, plumbing retrofits and more.  

At the company’s Rancho Cordova property on White Rock Road, a different sort of facelift is taking place. That building was previously occupied by single-tenant Catholic Healthcare West. Since that organization vacated, Twin Trees has had to create a multitenant environment, knowing that, in this market, finding another tenant large enough to fill the entire space is unlikely. Twin Trees has spent roughly $1 million on the lobby alone.

Hartin and Twin Trees also hired marketing experts to recreate the company’s logo, redesign all of the marketing materials and update the property website. The result, says Hartin, is a handful of competitive properties that are now hosting more tours and potential tenants than before.

Down the street, Walker revamped another troublesome property.

The 40,000-square-foot high-tech Parkway Corporate Center in Roseville was a buildout from the dot-com era offering little application for today’s tenants. “But when we stared at it for a long while we realized it was the perfect space for a church,” Walker says. “Since churches have been growing dramatically since 2009, we focused there, and soon we landed Metro Calvary Church to take the entire space.”

Hartin says all the changes taking place seem a de-evolution of the market. In South Placer county especially, but elsewhere too, high-end perks and amenities are no longer the norm, and the gap between the haves and the have-nots is growing. The highest-end properties are upping the ante with finishing touches, while their average-Joe neighbors are shedding unsustainable amenities cash-strapped tenants and building owners can no longer afford.

“A lot of landlords have had to take these buildings and retrofit them to a more traditional environment. It’s been an amazing morphing of space,” Hartin says. “I doubt we will ever see them â?¨go back.”n office properties these days.

The economic downturn left a cache of premium office space up for grabs in central business districts across the Capital Region and a glut of available space in suburban markets. As a result, building owners and commercial brokers representing office properties in Roseville, Rocklin, Natomas and beyond are working tirelessly to rehab, repurpose and rebrand those properties in a competitive market.

“During the boom, the biggest factor was availability. People would look at the suburban markets for rent, which was often cheaper; buildings were often newer and had more amenities. Now, in the central business district, the vacancies are a lot higher and rents have come down,” says Gretchen Tobin, commercial development manager for Mourier Land Investment Corp. “One of the biggest things we have to do is educate brokers and tenants about our properties … half the battle is getting people to come look at our buildings.”

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