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North Bay Business Journal

Monday, December 16, 2013, 6:30 am

Commercial Development Guide 2013: Retail, industrial lead Sonoma County market

Yet, Petaluma has 100,000sf of office demand

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    Sonoma County’s office space market has been largely sluggish, while demand for retail space and, to a lesser degree, room for industrial operations has been vigorous.

    Much new retail space

    Sonoma County is gaining about 1 million more square feet of retail space in several major projects recently completed or underway.

    The return of Friedman’s Home Improvement to Petaluma after nearly four decades is moving forward as a new 315,000-square-foot mixed-use center in the city comes out of the ground. Santa Rosa-based Ghilotti Construction Company in early July started preparing the 9.5-acre site for a Friedman’s store at Deer Creek Village. The store is scheduled to open in March 2014. Deer Creek Village, being developed by San Francisco-based Merlone Geier Partners, covers 36.5 acres at the southwest corner of Rainier Avenue and North McDowell Boulevard adjacent to Highway 101.

    Several years coming, the city’s newest and largest shopping center, 342,661-square-foot East Washington Place regional mall, had its first store openings in early June by junior anchor tenants Dick’s Sporting Goods and Sprouts Farmers Market. Anchor tenant Target, which purchased its land in the center, opened July 24. Joining them through the center and fall have been Beverages & More in a freestanding building, T.J. Maxx and HomeGoods in the same building as Dick’s and Sprouts. With nearly all the space leased, smaller retailers have had scheduling openings throughout the latter part of this year.

    Play Area 2 at The Barlow - Frankie Norstad photo

    Tenants set to occupy these buildings around one play and events area at The Barlow include Village Bakery, The Juicery and SubZero Ice Cream. (image credit: Frankie Norstad)

    Arkansas-based Wal-Mart, which has been trying to expand grocery selections at its existing west Rohnert Park store, plans to open one of its smaller-format stores in the northeast part of the city. A 33,000-square-foot “Wal-Mart Neighborhood Market” store is targeted to open in fall 2014 in the former Pacific Market space in the Mountain Shadows Shopping Plaza at Golf Course and Country Club drives. Pacific Market closed about two years ago and was the anchor tenant.

    “We’ve received significant feedback from the community regarding this vacancy and an overwhelming majority has asked that we consider an affordable grocery tenant in this location,” said Jeff Boyd, manager of plaza owner Mountain Shadows Investors.

    Completion of East Washington Place, now Petaluma’s largest shopping center, is part of about 1 million new square feet of retail space in Sonoma County.

    The smaller Wal-Mart store would employ 65 full- and part-time. The company recently opened one in Vallejo.

    Under construction at the county’s largest shopping center, Coddingtown in Santa Rosa, is a 143,000-square-foot Target department store, which replaces a former two-story former Gottschalks store. Target is set to open there in July 2014. Codding Investments, which owns the former Los Robles Lodge site just south of Coddingtown, plans to build a 50,000-square-foot store of Dick’s Sporting Goods there.

    Industrial space dwindles

    Vacancy for industrial space overall is half that for office space, particularly in the business parks north of Santa Rosa near the airport. The proportion of warehouse and light-industrial space that was available in that area dropped to 6.0 percent in the third quarter from 14.0 percent a year before, according to Keegan & Coppin Co. Inc./ONCOR International.

    “The industrial market continues a slow path to recovery, with continued slow growth and slight pressure on rents,” said Shawn Johnson, managing partner.

    A key indicator for that activity is net absorption of commercial space — how many more square feet are leased or sold than made available. In the third quarter, there was net absorption of a whopping 700,000 square feet of industrial space, led by 478,000 square feet north of Santa Rosa and almost 239,000 square feet in Santa Rosa itself, based on Keegan & Coppin’s figures.

    One big example of industrial space coming off the market is Alexander Valley Cellars, which in spring expanded by 110,000 square feet into the rest of the 282,000-square-foot wine warehouse at 1010 Shiloh Rd. in Windsor.

    “The market for warehouse space is actually tight now,” said Larry Wasem, managing partner of Airport Business Center, owner of that property and developer of surrounding business park. “Unfortunately, not many are able to build. I expect to see prices rise as a result.”

    This summer, Express Wine Delivery expanded to 70,000 square feet at 7970 Cameron Dr. further to the north in Windsor.

    North Sonoma County industrial vacancy will shrink further as Rack & Riddle Wine Services of Hopland leased a 67,000-square-foot vacant wine barrel warehouse in Healdsburg.

    Aldridge Management and Highway Partners completed 120,000 square feet in 11 food-and-beverage production and retail space at The Barlow in Sebastopol. The development is now home to a couple dozen tenants, including local wine makers, brewers, distillers, a community market, coffee shops, food producers, artisan manufacturers, retailers and restaurants. A boutique hotel there also is in the works.

    Packaged vegetarian foods maker Amy’s Kitchen has been trying to come up with a new plan for a major production expansion in Sonoma County after learning that its original idea would cost about $31 million just for supplying an envisioned new plant in southwest Santa Rosa with water and treating what goes down the drain.

    The planned plant could employ up to 800 at full production. The company has been scouting the county for 10 to 12 acres of land to create a 250,000-square-foot plant, likely in phases. The Petaluma-based company expects to need that capacity in two to three years.

    Wright Engineered Plastics doubled the size of its production facility and adding 100 workers to accommodate greater demand for injection molding of parts as well as assembly of products in the U.S. It relocated in summer to a 46,000-square-foot new plant at 3681 N. Laughlin Rd. near the airport. In addition to double-digit revenue growth in recent years and an estimated 25 percent this year, a new customer that required a significant increase in assembly work plus filling a number of ocean-going containers on site necessitated the move.

    Petaluma continues to garner interest for industrial space. More than 200,000 square feet worth of space requirements — about half for current Petaluma tenants and the rest for newcomers — are active enough to bring the vacancy rate from around 12 percent for much of 2013 to below 10 percent in the next six months, according to Steven Leonard of Cassidy Turley. Dwindling available space has some developers considering industrial projects.

    Mill Valley-based Leslie’s Organics, LLC,  shifted from third-party logistics for its Coconut Secret line of consumer products as sales increase. The company leased 18,000-square-feet of warehouse space at 1297 Dynamic Way in Petaluma in late April and moved in mid-summer.

    Healdsburg-based real estate investor Next Investments, Inc., and San Francisco-based Harrigan Weidenmuller Co., said to be San Francisco’s oldest real estate investor, on May 23 purchased a 50,000-square-foot south Petaluma food production facility that locally started Barbara’s Bakery operated until last year. The vacant building is located at 3900 Cypress Dr. in Oakmead Business Park. The buyers said the plant is suited to meet the “surging demand” for production space from North Bay specialty food and beverage producers.

    Office market ‘difficult’

    The vacancy rate for office space in Sonoma County was 21.0 percent in the third quarter, down from 22.2 percent a year before and 23.3 percent 24 months prior, according to Keegan & Coppin.

    Yet the office vacancy figure does mask a lot of office leasing in the previous 12 months. For example, net absorption of office space was 520,000 square feet through the third quarter, led by 230,000 in Rohnert Park and 174,000 in Petaluma, according to Keegan & Coppin. However, the closure of the State Farm Insurance claims center in Rohnert Park was largely responsible for a 363,500-square-foot adjustment in the amount of square feet in the submarket, resulting in annual net absorption for the county of only 76,000 square feet, rather than a sizable 520,000 square feet.

    “The office market in 2013 showed early signs of further decline, but all indications point to a slow recovery for the second half of the year with vacancy rates trending down,” said Mr. Johnson of Keegan & Coppin.

    The county’s office market is “very difficult,” because there aren’t a lot of tenants coming in and a number of those there are “very cautious” about adding employees as they “rightsize” their businesses, according to Joan Woodard, president and chief executive officer of Simons & Woodard, a Santa Rosa-based architecture, development and property manager for roughly 1 million square feet of office space in Santa Rosa.

    “We had a burst of energy toward office space leasing a year and a half ago for seven or eight months then kaput, and it has been pretty quiet for the last nine to 10 months,” Ms. Woodard said. During that “bubble” of activity, virtually every tour of space led to a lease, she said.

    High vacancy rates and pressure from lenders to fill space during a time of lower property values has exacerbated “flight to quality” competition among property owners to stay current with maintenance, storm-damage response and amenities to keep and attract tenants, according to Ms. Woodard.

    A San Francisco-based investor purchased two office buildings fully leased to Medtronic Vascular near Charles M. Schulz–Sonoma County Airport for $18 million. Drawbridge Brickway, LLC, on July 25 purchased the 126,500-square-foot twin two-story buildings on 7.8 acres at 3850 and 3880 Brickway Blvd. from SR Office Properties, LLC. The latter is the entity Basin Street Properties used to repurchase 17 Santa Rosa-area office buildings from Equity Office Properties in October.

    “Acquiring this premier property with a solid national tenant perfectly fits our acquisition profile,” said Mark Pearson, Drawbridge vice chairman. “With its high quality construction, and a prominent location in a growing market, we saw this property was a good fit for our portfolio.”

    Airport Business Center is preparing the sell another 7.7 acres of land at Aviation and Airport boulevards to American AgCredit to expand the lender’s planned 50,000-square-foot built-to-suit headquarters to 120,000 square feet. That is among few vacant lots left to sell in the industrial park, located near the county airport, according to Larry Wasem, managing partner of the park’s ownership.

    Three of the five buildings in the 70,000-square-foot Parkpoint Office Center complex in Santa Rosa were sold Oct. 18 to San Jose-based investor Ed Rosen for $6.3 million, or about $144,000 a square foot, according to Vince Schwab, a senior vice president of Marcus & Millichap. Two major tenants in the fully leased buildings are medical uses, Concentra Urgent Care and St. Joseph Health.

    Petaluma’s office market is a different story, according to Mr. Leonard of Cassidy Turley. Recent activity includes expansion by telecommunication equipment and software maker Cyan into the top floor an adjoining building Basin Street Properties has under construction at Redwood Business Center in northeast Petaluma.

    “There are probably 100,000 square feet of office requirements floating around,” he said.

    Demand for medical offices

    While the office market generally has been sluggish, demand for medical office space in Sonoma County has been active, including some of the only office space being built in the county.

    Sutter Health and Hammes Company broke ground Oct. 18 on a three-story, 80,000-square-foot medical office building adjacent to the  forthcoming $284 million new Sutter Medical Center of Santa Rosa. Owned and developed by Wisconsin-based Hammes, the building will house both Sutter Pacific Medical Foundation physicians and other health care tenants. Occupancy is expected to begin in September 2014.

    Kaiser Permanente wants to build a medical office building on 10 acres in southwest Santa Rosa. The potential property being explored is near Northpoint Parkway and Corporate Center Parkway, near Stony Point Road in Northpoint Corporate Park. If the health maintenance organization decides to proceed, the property could change hands in early 2014, according to the developer, Simons & Woodard.

    A Southern California real estate investment trust for medical office buildings in late December 2012 purchased the 100,125-square-foot Sutter North Bay Health Plaza building, also known as Landmark Executive Center, fronting on the west side of Highway 101 in northwest Santa Rosa. It is mostly occupied by Sutter Health. The REIT was among eight serious prospective buyers of the building, which was on the market for only two months after being marketed to buyers of medical offices.

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