Has commercial real estate hit bottom in Santa Cruz County?


SC Sentinel 05/03/2010

SANTA CRUZ — The county’s once hot commercial real estate market has cooled considerably, with nearly a million square feet of office space empty at the start of the year and asking rates dropping compared to a year ago.

The market hasn’t hit the 1 million mark since 2004, according to Cassidy Turley BT Commercial, which reviews the data for Santa Cruz County quarterly.

Last week, Wells Fargo closed three bank branches as it completed its acquisition of Wachovia, putting new office space on the market in Capitola, Aptos and Scotts Valley. Sue Lewis, community president at Wells Fargo, said it didn’t make sense to keep them open because all three had bank branches nearby.

Leasing agent Matt Shelton of J.R. Parrish said activity picked up in the first quarter in Scotts Valley, which has the most commercial space in the county.

“We’ve leased more this year than in the last 18 months,” Shelton said.

The deals included: Embarcadero Technology, which leased 20,000 square feet in the Granite Creek Business Center, moving from the former Borland campus; helmet-maker Easton-Bell, which took another 11,000 square feet on Scotts Valley Drive and brought people here from Los Angeles; and Roku Networks, which expanded from 3,000 to 10,000 square feet on El Pueblo Drive.

University of the Pacific economist Jeffrey Michael predicts a slow five-year recovery for the state, with Silicon Valley showing early signs of growth. His forecast says sustained business investment is needed to sustain the recovery against forces such as state and local government cuts, foreclosures and tight credit conditions.

In Scotts Valley, office vacancy had risen to 18.9 percent at the end of 2009 compared to 17.7 percent a year before. Asking rates averaged $1.80 per square foot, down from $1.97.

Industrial vacancies rose to 7.3 percent from 3.3 percent in the same time frame, with the asking rate dropping 11 cents to 85 cents per square foot triple net.

In Mid-County, which includes Capitola, Aptos and Soquel, office vacancies rose from 4.4 percent to 7.9 percent while asking rates dropped 8 cents to $2.12 per square foot. Industrial vacancies grew from 3.5 percent to 4.8 percent, with asking rates falling 15 cents to 86 cents per square foot triple net.

Kohl’s took 11,000 square feet at the Capitola Mall and LED Green Power leased 7,350 square feet on Chanticleer Avenue in Santa Cruz but the Gottschalks space in the mall remains vacant.

Watsonville’s office vacancies rose from 5.4 percent to 8.2 percent; asking rates plummeted from $1.95 per square foot to $1.63. Driscoll Strawberry leased 8,600 square feet at the Westridge Business Park but Cassidy Turley called leasing “anemic.”

The normally stable industrial market eased with vacancies rising from 1 percent to 3.2 percent due in part to a large warehouse listed for sublease; asking rates dropped from 78 cents per square foot to 55 cents.

In the city of Santa Cruz, office vacancies edged up from 14.7 percent to 15.2 percent. Asking rates were $1.88 per square foot, off by just 4 cents.

The industrial market vacancy remained 8.7 percent. Staff of Life purchased the empty 18,000 square foot Pacific Coast car dealership on Soquel for its expansion project, but Cassidy Turley said leasing was sluggish.

Other major developments are on hold, including the Skypark Town Center in Scotts Valley, the Delaware Avenue mixed use project in Santa Cruz, and Sutter’s medical office planned on Chanticleer Avenue in Santa Cruz.

Shelton said a bigger Scotts Valley transaction, for 44,000 square feet, is “an inch away” from getting city approval.

It’s not already in the county and it’s not high-tech, he said, declining to name the firm until the deal is finalized.

“It gets better every day,” Shelton said. “The more people believe they’ve hit bottom, they’re more willing to make a move.”

Michael Schoeder of Cassidy Turley is representing Wells Fargo for the property available in Capitola and Scotts Valley.

The bank is asking $1.4 million for the former Wachovia building comprising 3,886 square feet at 1830 41st Ave. in Capitola near Whole Foods and the Capitola Mall. Already four offers have come in, according to Cassidy Turley managing broker Carol Canaris.

Wells Fargo has 3,420 square feet at 203 Mount Hermon Road in Scotts Valley is available for sublease; the lease expires March 31, 2012.

“If there’s a tenant we’ll take it,” said Jared Bogaard, whose family owns the building.

The vacant bank branch in Aptos was developed by Joe Appenrodt, who was unavailable to comment.

“Since the Aptos Village Plan passed it should become a very desirable space,” said Karen Hibble of the Aptos Chamber of Commerce. “It is a large space and parking is good as are the views from some of the windows. We certainly hope it does not remain vacant too long.”