2016 COMMERCIAL REAL ESTATE FORECAST

Keegan & Coppin REAL ESTATE KEEGAN & COPPIN COMPANY, INC. O N C O R I N T E R N AT I O N A L Commercial Real Estate Services 2016 COMMERCIAL REAL ES...
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Keegan & Coppin REAL ESTATE

KEEGAN & COPPIN COMPANY, INC. O N C O R I N T E R N AT I O N A L Commercial Real Estate Services

2016 COMMERCIAL REAL ESTATE FORECAST

Santa Rosa Office 1355 North Dutton Avenue Santa Rosa, CA 95401 (707) 528-1400 [email protected]

Larkspur Office 101 Larkspur Landing, Suite 112 Larkspur, CA 94939 (415) 461-1010 [email protected]

Petaluma Office 1201 N. McDowell Blvd. Petaluma, CA 94954 (707) 664-1400 [email protected]

ONCOR INTERNATIONAL

Napa Office 477 Devlin Road, #104 Napa, CA 94558 (707) 252-1400 [email protected]

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NORTHBAY OVERVIEW - 2016 By: Al Coppin

Capitalization rates continue to trend downward in spite of the Federal Reserve raising rates. Commercial vacancies have dropped significantly and rental rates are moving up. With the Fed rate up, commercial loan rates are up as well. Demand for commercial investments remains strong and Wall Street money is still chasing institutional investments keeping CAP rates compressed. San Francisco was just named the city with the most expensive office space in the country. Southern Marin and Central Marin are seeing upward pressure on office rents as institutions close on office deals and begin their property repositioning. Demand in Marin and Sonoma County for office space and in particular for industrial spaces will grow consistently in the next year and adding to that demand many main street tenants, finance, professional and bio-tech companies are looking northward as they are being outbid for space in San Francisco and upper Silicon Valley. In addition as employees of many of the Social Media and Mobile tech companies in San Francisco and South Bay mature and join wine clubs in Sonoma County, they may gradually move northward for lifestyle purposes and may start new ventures in the North Bay in time. A 2015 survey from the Urban Land Institutional shows that Millennials that prefer to live in the city is declining and conversely Millenials that prefer to live in the suburbs is growing. Hence the gradual growth pressure from San Francisco and South Bay will gradually come to the North Bay. Net Absorption of Spaces and Vacancy for 2015 is as follows: Marin Absorption Vacancy Office 153,000 sf 17.6% Industrial 40,000 sf 3.3%

Absorption 101,000 sf 439,000 sf

Sonoma

Vacancy 16.4% 5.8%

Industrial space in Sonoma County will continue to be in high demand from companies in Marin and other Bay Area locations. Office Rents in Southern Marin may rise in 2016 but Novato and Sonoma Counties will see moderate rental increases. Industrial rents are staged to increase dramatically as demand outstrips supply.

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NORTHBAY OVERVIEW (cont.) Industrial vacancies are 3.3% in Marin and 5.5% in Sonoma. Sonoma has 1.4 million sf of available industrial space with growing local demand as well. Office space will follow suit but demand is still moderate compared to supply. A large component of the base in office is functionally obsolete so repurposing and renovation of office properties will be important to meet new requirements of office occupiers. Sustainability and energy efficiency standards will be expensive upfront costs but essential to upgrading properties. This is partly why industrial properties are so popular with private investors. On the other hand institutions continue to upgrade and swap major office properties. They can afford to invest in major upgrades and command lower CAP rates with the improved property. Private investors prefer industrial or flex as occupiers generally take space with low to moderate turnover costs. The supply side of private investor level properties has been reduced substantially in the past two years, leaving investors scouring the market for opportunities. This is why CAP rates have remained low in spite of the Federal rate hikes. We continue to be bullish on the economic prospects for the North Bay with its diversity and welcoming of new innovative companies.

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NORTH CORRIDOR/WINDSOR OVERVIEW By: Shawn Johnson

The north corridor real estate office market greatly improved over 2015 which resulted in a net absorption of 306,248 sq. ft. Office vacancy rates decreased with rates at 15.7% in the fourth quarter of 2014, and 10.6% in the fourth quarter of 2015. Industrial vacancy saw continued improvement as well which has spurred on recent land purchases and construction projects in the area. Industrial vacancy rates decreased from 5.0% in the fourth quarter of 2014 to 2.7% in the fourth quarter of 2015. Office rates slowly raised in the past year with Class A rates ranging from $1.75 per square foot to $1.95 per square foot, full service, and Class B rates held with rates ranging from $1.35 to $1.50 per square foot, full service. Sonic.net completed installing its new fiber optic network in the Sonoma County Airport Business Park area. This new network offers Gigabit broadband plus business Hosted PBX phone service in a bundled offering. Gigabit Internet access is one of the fastest Internet connections available, and the cloud based Hosted PBX solution will provide next-generation telephone service to businesses at the Airport Business Park. Industrial lease rates range from $.57 to $1.10 per square foot, NNN for higher quality warehouse manufacturing space and as low as $.50 to $.70 per square foot, gross for older/larger warehouse spaces which there are very few available buildings in the market. Industrial activity has picked up with the beer industry but supply is limited for brewery facilities. In 2015 Keegan and Coppin has been involved in approximately 147 office leases ranging from 120 square feet up to 33,325 square feet totaling 472,667 square feet for both renewals and new leases. The industrial market has seen approximately 74 leases ranging from 550 square feet up to 143,750 square feet with a total of 780,077 square feet of industrial space leased or renewed. With the economy showing signs that the recovery is in full swing, the forecast for 2016 is more upbeat. With interest rates remaining relatively low, companies are taking advantage and purchasing available properties that have come on the market. Unemployment has not been this low in the county since December 2007. Unemployment at the end of the 2015 was 4.2% in Sonoma County, which is lower than the state average at 5.8% in December of 2015. Sonoma County ranked 6 for the State of California, with Marin County as 2 and San Mateo as 1 for unemployment. Sonoma County currently has a labor force of 258,100, and steadily growing. Office user expansion is just now starting to affect the market place which will continue to help bolster the regional and local economy.

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SANTA ROSA OVERVIEW By: Dave Peterson

The Santa Rosa Industrial market is the strongest we have seen in many years and currently is the tightest market of all property types. This is a result of years of low rents that did not justify new construction. We are seeing more companies considering build to suit opportunities as the inventory of existing buildings do not meet the needs of tenants. The industrial vacancy rate in Santa Rosa was 7.6% at the end of the 4th Quarter 2015 which was 2% lower than the 9.6% vacancy rate at the end of 2014. The low inventory is leading to multiple lease offers on good quality industrial spaces. This demand is also pushing rents up by 15%-20% in some instances. Rental rates are currently ranging from $.70-$.90 per square foot gross. We anticipate the vacancy rate to continue to drop over 2016. With rents increasing we are starting to get to a point where speculative construction can make sense. Rents for speculative construction need to be in the $.85-$.90 per square foot level on a NNN basis. While slightly higher than current rents, some tenants are making the decision to pay more for the ability to keep their companies in the county. We estimate that we need upwards of 4,000,000 square feet of additional industrial space to keep up with demand and a 7% vacancy rate into the year 2020. The Santa Rosa office market is showing significant signs of strengthening as the 1st Quarter of 2014 comes to a close. Tenant demand and tours of properties are increasing especially for tenants in the 3,000-10,000 square foot range. The vacancy rate for Santa Rosa office space stood at 15.6% at the end of the 4th Quarter of 2015 down from 16.4% at the end of the 4th Quarter 2014. This decrease in vacancy represents approximately 57,000 square feet of positive absorption. We anticipate 1st Quarter 2016 vacancies to further decrease and for this downward trend to continue throughout the rest of 2016. We are currently seeing Class A properties in the best locations commanding rents above $2.00 per square foot fully serviced. We expect this trend of increasing rents to continue throughout 2016 and into 2017 as many of these upper tier properties are 85% or more occupied. Office rents in lower quality properties are also experiencing increases of 15%-25% to the $1.65$1.85 per square foot full service levels as property owners find themselves on much stronger footing than previous years. Tenant inducements such as free rent can still be negotiated albeit on lower levels than previously obtained by tenants over the past few years. The free rent is being used by landlord’s to help bridge the gap between expectations and provide lower “effective rents” to tenants while keeping the higher lease contract rates. In addition, turn-key tenant improvement packages are still prevalent in most lease transactions as many landlords are able to obtain better contractor pricing than tenants based on relationships. The purchase market for owner/user office buildings has slowed slightly resulting more from a lack of supply than that of lower buyer demand. Interest rates continue to be at all time lows and lenders are bullish on owner/user SBA financings. This low cost of funds is providing companies the ability to purchase and secure long term financing that often results in a lower cost to own a building than leasing it on a monthly cash basis and even more so when tax advantages of ownership are considered. The Santa Rosa office leasing and purchase markets are definitely on the upswing and we recommend that tenants and buyers take advantage of locking in longer term leases or purchasing now as we anticipate higher rents, higher prices and lower vacancies over the next twelve to eighteen months.

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ROHNERT PARK/COTATI OVERVIEW By: Kevin Doran

2016 is shaping up to be a year of continued growth and increased demand for most sectors in the commercial real estate market in the Rohnert Park/Cotati areas. The market continues to show positive momentum for retail and industrial facilities. Leasing activity and occupancy levels continue to improve slightly. Occupancy is increasing as occupants are acquiring their own buildings as rent vs. purchase which is proving to be more advantageous for business operators and tenant users. Rohnert Park/Cotati sales and rental prices, like many other Sonoma County cities have been firming and landlord concessions are leveling off. The industrial and retail markets remain steady. It appears the demand is still high for smaller industrial incubator units, industrial space ranging between 3,000 and 10,000 feet, and smaller retail space. The vacancy rate for industrial space over 25,000 feet is zero. Vacancy rates in industrial and retail are firming and continue to decline. There continues to be no spec office, industrial, or retail buildings being developed. There will continue to be demand for industrial space for the near and foreseeable future. The office market has remained relatively flat and is experiencing minimal positive absorption, the office market will continue to underperform the industrial and retail market due to lack of new jobs coming into this submarket. We will continue to see tenants test the market or exercise other landlords for a flight to new space with more favorable terms. This lack of new business opportunities in the office industry has created a lull in the number of small business coming to Rohnert Park/Cotati areas. Investors continue to attempt to be in the market place for all of 2015. This should continue for calendar year 2016, however, the lack of quality investments allow for barriers of entry to the submarket continue to exist. The top product type multi-tenant industrial or strong retail properties will continue to be in low supply and high demand. Multi-family apartments and other housing related properties are still strong stable investments with low return on investments. Rents continue to be flat the market for office rents are still in the range of $1.35 - $1.80 psf for full-service. The rents for industrial space has increased approximately 10% from $.55 - $.60 to $.68 - $.72 per square foot. Retail continues to remain consistently flat with rents. Overall this submarket remained fairly steady during the 1st quarter of 2016. Vacancy rates also improved in the 1st quarter. Office property vacancy is approximately 30.4%; industrial property vacancy is 8.4%; and retail property vacancy is approximately 6.5% respectively. Rental rates improved and increased at the end of the calendar year 2015 and continued to increase in 1st quarter of 2016. The lending market is still very competitive and interest rates are low for owner users and investors. This will help continue to increase the sale activity and volume of building sold. With the array of options and positive outlook for the future, Rohnert Park/Cotati is an excellent location to consider for your commercial real estate needs.

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PETALUMA OVERVIEW By: James Manley

Petaluma experienced positive industrial absorption throughout 2015. The market vacancies over 4 quarters were: • •

Q4, 2014 Industrial: 6.6% Q4, 2015 Industrial: 4.1%

Result: The tight Industrial Market got much tighter. There were some large deals, such as the sale of 1450 Technology Lane (roughly 80,000 sf of Industrial with a total building size of 125,000 +/- sf) and 80,000 +/additional sf at 3800 Lakeville leased to Morris Distributing. Those two deals took a healthy bite out of the standing vacancy, but the absorption was primarily driven by deals in the sub-10,000 SF range. Because of lack of Southerly inventory, the asking rate for Industrial space has increased by about 10% to the $.90 - $1.00/psf range on a Standard Industrial Gross basis. Forecast: We will continue to see upward pressure on Industrial rates throughout 2016. While there will be some moves generated within town for existing tenants addressing their needs, we also expect migration from both directions on 101. Those moving north will be primarily cost driven, while those moving south hope to increase market draw and more favorable distribution routes. There are two projects in the market which should alleviate some of the pressure; however neither has broken ground yet. Petaluma’s Office did not fare well. The most previous four quarters were virtually flat: • •

Q4, 2014 Office: 15.8% Q4, 2015 Office: 15.9%

Result: Petaluma, despite its quality of life draw, continues to be a tough sell for office space. Most office deals are still in the incubator-sized range and businesses that ‘right-size’ basically create a wash. Some grow, some shrink, others watch the pot simmer and wait to see how the economy performs. Office tenants are always more cautious than Industrial tenants. This is partially due to a higher level of oversight, but is also due to fear of previous market corrections being projected against current national and global developments. It doesn’t matter if Google moves in to the market. It doesn’t matter if a biomed obtains FDA approval. While these developments impact the local economy, the office market is driven by tenants and buyers with an eye on global enterprise. It doesn’t make any sense, but it is a consumer confidence-driven package. Forecast: Despite the gloomy numbers above, we should start to see some positive market absorption. I don’t believe we will see any upward pressure on rent, but I do believe we will see a reduction in vacancy due to dwindling supply and steep rent increases in Marin County office rents. There comes a point where decision makers start looking at their bottom line despite that which is happening hundreds (or thousands) of miles away.

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NAPA COUNTY OVERVIEW By: Mike Miller

Like much of the Bay Area, 2016 looks to be a challenging but growth orientated year for the commercial real estate market in Napa County. There are several encouraging signs that the market is still growing but at a somewhat slower pace. While the wine industry continues to dominate Napa growth, new businesses moving into the South County area over the last decade have included pharmaceutical, biotech and software firms. Many projects begun over the last few years were recently completed and have acquired good tenants which keep their vacancy rates low. Projects recently completed and now planning additional phases include Napa Junction, a mixed use development and super Wal-Mart store in American Canyon and in the City of Napa the Oxbow Public Market. Also, there are now over 32 wine tasting venues in the downtown area with more planned. The year 2015 saw several new businesses move into the downtown area and the languishing Napa Town Center was recently leveled for new construction. Set to fully open in the fall of 2016, the project which will now be called Napa Center will create a shopping and lodging district with 153,000sf of space for 40 stores and restaurants and a seven story four-star luxury hotel. The 98,000sf downtown COPIA site which was in bankruptcy has been purchased by the Culinary Institute of America and should be a significant addition to the many new downtown tourist attractions. Napa County sales and rental prices, like many other Bay Area counties, have been firming and landlord concessions leveling off. Historically the driving force for Napa Valley industrial real estate has been and remains wine related. Fortunately, there are currently several pending projects that could add upwards of 2 million square feet of new large warehouse space by the end of 2016. The current vacancy rate for industrial space in Napa County is approximately 10% and 7% for office space. In summary, if economic activity continues to pick up and job growth remains firm, Napa County commercial real estate and in particular industrial land and buildings, should be well positioned to continue its previous growth pattern and offers investors some interesting opportunities. With low to no returns on bonds and other fixed interest investments, increased tourism and an improving economy, Napa commercial real estate should prove to be an excellent upside investment over the next few years.

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MARIN COUNTY OVERVIEW Office By: Jeffrey Wilmore

“You can only know where you’re going, if you know where you’ve been”. So looking backwards will help us connect the dots going forward. Over the past couple of years, Marin County received some high accolades from Commercial Developers, Institutional Investors, Trusts and Owner Users, which purchased approximately 2,055,833 square feet of Class A properties throughout Marin County, close to 38% of all class “A” office space. All well located, multi-tenanted office properties and significantly below replacement cost, even with pricey sticker tags. Low interest rates have encouraged buyers and investors to bid aggressively on properties, pushing the average price per square foot higher. This will bring in new blood with new philosophy’s on managing and marketing commercial real estate. With Marin’s supply constrained market, rents will rise, especially from Larkspur South where asking rents, have surpassed pre-recession records and are in the low to mid $5.00 psf per month range, but rents market wide will increase. Marin County saw its overall vacancy drop slightly from 18.9% in Q4 2014 to 17.6% in Q4 of 2015 with a positive absorption of around 30,000 sf. Leasing activity was a little slower over the period, but the majority of the absorption was due to a major owner-user tenant that purchased 1650 Los Gamos Drive, Kaiser Permanente which will use 100,355 square feet for their medical space, projected to be completed by 2019. Unfortunately this absorption was offset by another major Marin corporation’s sublease activity, Fair Isaac placed 66,000 square feet on the market. The slight drop in vacancy year to year will be the new normal, a slow and steady low growth in the commercial market will be the case going forward. San Francisco has continued to prosper, fueled by technology companies and economic growth. The Cities expansion mode leads the nation in growth, hiring workers from all over the bay area, a 4.4% increase over the previous year, pushing the vacancy rate to new levels with no evidence of a slowdown. Most of the space is preleased to the tech and transportation industry. Mean while Marin County, 20 minutes away, offers office space that is about 38% lower than that of the City by the Bay and the cost of a median home is also 38% less and a highly educated workforce. At some point the allure of San Francisco will subside and business economics will prevail and that spill over from the technology boom will increase and benefit Marin. This has not been the trend in past for companies to cross the Golden Gate, but Marin County will benefit by the higher cost to do business in San Francisco. California’s economy has outpaced the rest of the country and Marin’s economy has outpaced that of California again, year after year. The principal engine of employment in Marin County has been professional services, the majority of leases done are between 1,800 and 4,500 square feet. Employment is expected to increase by 2.6 percent and unemployment bests the States average by .09 percent and should end up in the mid to low 4% by the end of the year. Technology, Bio/Life Science and Tourism are major industries in Marin County.

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MARIN COUNTY OVERVIEW Office (cont.) BioMarin (over 1,100 local workforce) continues to increase its real estate foothold in Central San Rafael which adds to the economic growth of the County. It will own over 50% of the Class “A” office market in Central San Rafael. This would make it the second largest single-owner of office space in Marin behind the former 750,000 square foot Fireman’s Fund campus in Novato. The Buck Center, Raptor Pharmaceutical, Ultragenyx have also expanded to lead the charge. With the prominence and prestige of these companies, other life science companies will be attracted to the area. Marin County is now home to more life science companies per capita than any other County in California, currently home to over 200 life science companies. Biotech and pharma companies tend to be smaller than the Tech companies and this bodes well for Marin’s commercial market. There is collaboration of efforts from the North Bay Life Science Alliance, Novato Economic Development Commission, The Buck Institute, Marin Economic Forum and North Bay Leadership Council along with associated groups in Sonoma and Solano Counties to entice Bio and Life Science companies to relocate to Marin and the entire North Bay. Novato is poised to see future growth with the mostly vacant Fireman’s Fund campus available for redevelopment and several parcels of land available for sale, mostly zoned for office development. Some of the last developable land in the County. So, no need for a Crystal Ball to forecast the future, just the past. The mainstream view for Marin County in 2016 should see continued slow growth with positive projections for companies, workers and consumers. Growth is expected to be between 2.5% and 3% (the average has been in the 2% to 2.5% since the recovery began 6 1/2 years ago), so smooth sailing in light winds for 2016. Notable Marin Sales in the last two years: Hamilton Landing, Novato 88 & 75 Rowland, Novato 7250 Redwood Blvd., Novato Larkspur Landing, Larkspur 5725 Paradise Dr., Corte Madera 4040 Civic Center, San Rafael 4000 Civic Center, San Rafael Drakes Bay Office Park 899 North Gate, San Rafael 16450 Los Gamos, San Rafael San Rafael Corporate Ctr. (Bio Marin)

$82,000,000 410,000 sf $25,000,000 143,444 sf $16,250,000 87,000 sf $82,000,000 199,046 sf $51,000,000 97,410 sf $34,900,000 130,237 sf Not disclosed 142,364 sf Not disclosed 130,177 sf $13,500,000 55,000 sf $22,000,000 148,000 sf $116,000,000 314,788 sf

$200 psf $174 psf $186 psf $412 psf $523 psf $267 psf $245 psf $149 psf $368 psf

MARKET TRENDS Sonoma County AVAILABLE SPACE-INDUSTRIAL

SUBMARKET

BUILDINGS PLANNED (Sq. Ft.)

VACANCY RATE

0

4th Qtr. 2015 7.6%

Bldg. Base Direct Vacancy Sublease Vacancy Total Vacancy 10,312,903 757,267 23,757 781,024

Santa Rosa North Corridor (Airport Area, Windsor, Healdsburg) Rohnert Park Petaluma SONOMA COUNTY TOTALS

5,775,804 3,093,990 5,167,940

147,064 236,799 213,670

6,026 23,950 0

153,090 260,749 213,670

0 0 0

2.7% 8.4% 4.1%

24,350,637

1,354,800

53,733

1,408,533

0

5.7%

30,000,000

Santa Rosa

25,000,000 North Corridor (Airport Area, Windsor, Healdsburg)

20,000,000 15,000,000

Rohnert Park

10,000,000

Petaluma

5,000,000

SONOMA COUNTY TOTALS

0

Bldg. Base

Sublease Vacancy

Total Vacancy

AVAILABLE SPACE-OFFICE

SUBMARKET

Santa Rosa

Direct Vacancy

Bldg. Base Direct Vacancy 7,129,897 1,044,218

North Corridor (Airport, Windsor, Healdsburg)

2,334,348 1,466,247 3,404,894

Rohnert Park Petaluma

SONOMA COUNTY TOTALS 14,335,386

Sublease Vacancy Total Vacancy 66,539 1,110,757

BUILDINGS PLANNED (Sq. Ft.)

VACANCY RATE

Buildings Planned 91,800

4th Qtr. 2015 15.6%

245,250 412,408 541,605

2,050 32,693 1,168

247,300 445,101 542,773

419,252 40,000 38,904

10.6% 30.4% 15.9%

2,243,481

102,450

2,345,931

589,956

16.4%

16,000,000 14,000,000

Santa Rosa

12,000,000

North Corridor (Airport, Windsor, Healdsburg)

10,000,000 8,000,000

Rohnert Park

6,000,000

Petaluma

4,000,000

SONOMA COUNTY TOTALS

2,000,000 0

Bldg. Base

Direct Vacancy

Sublease Vacancy

Total Vacancy

MARKET TRENDS Marin County AVAILABLE SPACE - INDUSTRIAL

SUBMARKET

BUILDINGS PLANNED

Bldg. Base Direct Vacancy Sublease Vacancy Total Vacancy 455,000 0 800 800 126,000 970 0 970 295,500 0 0 0 698,000 11,153 0 11,153 3,091,188 68,174 1,950 70,124 1,778,659 118,426 11,000 129,426

Sausalito Mill Valley Corte Madera Bahia de Rafael San Rafael Novato

MARIN COUNTY TOTALS 6,444,347

198,723

13,750

212,473

0 0 0 0 0 0

VACANCY RATE 4th Qtr. 2015 0.2% 0.8% 0.0% 1.6% 2.3% 7.30%

0

3.3%

7,000,000 6,000,000

Sausalito

5,000,000

Mill Valley Corte Madera

4,000,000

Bahia de Rafael

3,000,000

San Rafael

2,000,000

Novato

1,000,000 0

MARIN COUNTY TOTALS

Bldg. Base

Direct Vacancy

Sublease Vacancy

Total Vacancy

AVAILABLE SPACE-OFFICE

SUBMARKET

BUILDINGS PLANNED

Bldg. Base Direct Vacancy Sublease Vacancy Total Vacancy 525,194 17,462 10,874 28,336 17,715 1,150 0 1,150 346,515 61,258 0 61,258 411,168 34,151 14,960 49,111 638,442 53,648 8,837 62,485 3,077,662 491,751 86,964 578,715 2,588,296 301,997 256,383 558,380

Sausalito Tiburon Mill Valley Corte Madera Larkspur-Greenbrae San Rafael Novato

MARIN COUNTY TOTALS 7,604,992

961,417

378,018

1,339,435

0 0 0 0 0 0 0

VACANCY RATE 4th Qtr. 2015 5.4% 6.5% 17.7% 11.9% 9.8% 18.8% 21.60%

0

17.6%

8,000,000 7,000,000

Sausalito

6,000,000

Tiburon Mill Valley

5,000,000

Corte Madera

4,000,000

Larkspur-Greenbrae

3,000,000

San Rafael

2,000,000

Novato

1,000,000 0

MARIN COUNTY TOTALS

Bldg. Base

Direct Vacancy

Sublease Vacancy

Total Vacancy

DEMOGRAPHICS