MARIN COUNTY - Office rents in southern Marin continue to increase as space tightens, while retailers, health care organizations and high-technology companies vie for dwindling available space throughout the county.

Office space vacancy rates have been falling and rents rising in southern and central Marin, with the rent increases becoming more pronounced in the first half of 2007. Average asking rents increased 20.1 percent in Sausalito, Tiburon and Mill Valley to $3.32 a square foot on a full-service basis from mid-2006 to mid-2007, while the vacancy rate slipped to 7.1 percent in that period, according to NAI BT Commercial.

In Corte Madera, Greenbrae and Larkspur, average rent increased by the same proportion to $3.58.

Driving rent increases in the first half of 2007 was New York-based Blackstone Group, which early this year acquired the 40 percent share Equity Office Properties Trust had in top-class Marin properties, according to Whitney Strotz of NAI BT. For example, he brokered a lease at Larkspur Landing Office Center in late 2006 at $2.75 a square foot. Then six months later he was involved in a deal in the same development at nearly $4.

"All class levels are getting activity, but the driving force in escalating rent rates is in class A," he said.

For example, asking rates at several properties in the Terra Linda area of north San Rafael have moved up, with the exception of a 20-cent-a-square-foot bump at Barker Pacific's Hamilton Landing campus in Novato asking rates in San Rafael and north Marin have been steady.

High demand, low supply
The vacancy rate in San Rafael's 3.5 million square feet of office space rose to 18.2 percent in mid-2007 from 16.1 percent a year before, while the rate for Novato's 3.1 million square feet slipped to 12.5 percent from 17.4 percent. The overall Marin vacancy rate was 14 percent in mid-2007.

The sizeable drop in Novato has largely come from aggressive leasing at Hamilton Landing, which has pulled in more than 150,000 square feet of deals in that time period, most notably with Disney's Digital Arts division rumored to be negotiating for one of the two 55,000-square-foot hangars Barker Pacific plans to start remodeling in 2007. Before the hangar is done, the division would occupy as much space at 1 Thorndale Drive in San Rafael, according to other market talk.

"We're facing the classic problems in Marin with strong demand and low supply," said Bill McCubbin, CEO of brokerage Orion Partners.

Historically, low vacancy and high rents in Marin lead to mass migration of companies to Sonoma County, Mr. McCubbin said.

Sure to shake up Bay Area retail real estate in the next few years are the aggressive expansion plans of United Kingdom-based retail giant Tesco, according to Mark Koenig of NAI BT Commercial Terranomics. The company is scouting for "convenient" locations in Sacramento and around the bay, including the Highway 101 corridor in Marin and Sonoma counties.

The company has brought its corner-market concept - already in a dozen countries in Europe, Turkey and Asia - to the U.S. under the brand name Fresh & Easy Neighborhood Market. The format offers produce and gourmet foods in locations of 10,000 to 15,000 square feet, rather than the common 30,000 to 50,000-square-foot size of U.S. supermarkets, and aims to allow customers to get in and out of the store quickly.

"It's a lot easier to look for 10,000 to 15,000 square feet than 30,000 to 50,000 square feet," Mr. Koenig said.

Other retail growth in Marin includes Costco Wholesale's prototype expansion to 150,000 square feet of departmentalized space in its Novato store at Vintage Oaks Shopping Center. The Home Depot continues to search in Novato for a second 100,000-square-foot Marin store after a prospective development just south of Vintage Oaks proved too pricey.

Also, U.K.-based Grosvenor is under construction on its 100,000-square-foot Hamilton Gateway center in southeast Novato, anchored by a relocated 55,000-square-foot Safeway store. Dirt is also moving on Lalanne Group/Signature Properties' Whole Foods Market-anchored development on the west side of Novato.

Sutter Health is shaking up Marin commercial real estate with acquisitions of retail and office properties in San Rafael and Novato. In May, Sutter purchased the 80,000-square-foot Marin Square shopping center and offices in San Rafael. At press time Sutter was in escrow to buy 3.35 adjacent acres. Sutter previously announced plans for health care services at the center.

That shopping center represents 1.3 percent of 4.7 million square feet of shopping center space in 46 properties larger than 20,000 square feet, according to NAI BT Commercial. The retail vacancy rate countywide increased to nearly 4 percent in mid-2007 from 3.2 percent at the end of 2006.

In late 2006, Sutter spent $38.5 million to buy 100,000 square feet of office space at 100 and 101 Rowland Way in Novato with plans to convert it to medical office space by early 2008. That has sent the current tenants looking for space, including Environ, which along with Willis Finance of Sausalito has been angling for a spot in sublease space available at Fireman's Fund Insurance Co.'s Novato campus.

With serious interest in the Fireman's Fund campus and a 25,000-square-foot prospect at Hines' Marin Commons (formerly Marin Technology Center) in San Rafael, Marin's largest office properties are becoming active parts of the county's office inventory.

Houston-based Hines' other Marin property, San Rafael Corporate Center, at press time was in escrow. The 155,000-square-foot first phase was built six years ago and is 77 percent occupied.

Another large Marin property in escrow, with an expected year-end sale, is Marin City's Gateway Marin Center, which has attracted 100 interested buyers, according to Mr. Koenig, one of the BT brokers marketing the center.

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