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Construction hums along on Napa Valley warehouse space to meet demand from companies needing to store and move a large amount of North Coast wine and other goods coming into and going out from the San Francisco Bay area.

The second phase of the Greenwood Business Park warehouse project at the corner of Airport Boulevard and Devlin Road near Napa County Airport started construction in August, according to Brooks Pedder, whose Cushman & Wakefield team is marketing the project. The concrete slab has been poured on what is designed to be an 80,000-square-foot warehouse.

“That project had been in progress since 2005 mostly because of Army Corps and wetlands issues,” Pedder said. “Beringer worked on it for a long time and got a project approved, but it was voided when Beringer dropped the winery concept.”

San Diego-based IDS Real Estate Group purchased the 19.4-acre property earlier this summer reportedly for about $30 million. It is said to be the group’s first Northern California acquisition, coming soon after opening an investment office in San Francisco. IDS purchased the site from McMorgan Northern California Value Add Development Fund (MNCVAD-IND Greenwood CA), an investment fund comprised of Northern California trade union pension funds and led by New York Life Real Estate Investors and San Francisco-based McMorgan & Company.

The fund had acquired the full-entitled project in 2013 and spent about $20 million constructing a 226,000-square-foot warehouse last year. It was leased during construction to Windsor-based Vynapse LLC, part of Adams Wine Group and better known as the wine order fulfillment house Pack n’ Ship Direct.

Also in August, the hulking 644,000-square-foot first warehouse of Orchard Partners-Devco’s 218-acre Napa Logistics Park in American Canyon got the official occupancy go-ahead, Pedder said. For the past eight months, the whole building had been set to be leased to a fulfillment house, but that deal ultimately didn’t materialize recently, said Pedder, whose team also is marketing that project.

The second phase of the 218-acre industrial project is entitled and awaiting a go-ahead.

Up to this point, demand for big warehouse space in excess of new supply in Solano and Napa counties has been fueling the 1.36 million–1.49 million square feet currently being built there, according to Colliers International and JLL.

“From large warehouse investment sales to new speculative buildings being quickly leased, there are many indications of a strong and active market in Solano and Napa counties,” said Phil Garrett, executive managing director in Colliers’ Fairfield office.

The industrial vacancy rate for Solano and Napa counties declined in the second quarter to 6.2 percent of 49.5 million square feet, down from 6.6 percent in the first quarter, according to Colliers. Average asking monthly rental rates increased by 3 cents a square foot to 53 per square foot, on a triple-net basis.

The Napa Commerce Center project has 152,000 and 81,600-square-foot warehouses set to break ground next spring, according to Glen Dowling of JLL.

The Napa Airport Corporate Center project is seeking entitlements to break ground on two warehouses next spring, Dowling said. One would be a 254,000-square-foot cross-dock facility — items move from trucks on one side to trucks on the other — and the other would have 90,000 square feet.

Madera-based Stravinski Development Group, which has been building large warehouses in southern Napa Valley for more than two decades, has another local project ready to come out of the ground. The company, via affiliate SDG Green Island 258 LLC, recently purchased 10.79 acres at 450 and 520 Green Island Rd. In American Canyon. There is a proposal before the City of American Canyon to build a 258,000-square-foot warehouse there.

Steve Brock, real estate broker for the company, said there is even more in store for that area —construction next spring and acquisition of existing buildings — but the details are being kept under wraps until early next month.

“It’s not nearly the size of the Orchard [Partners] park, but it is a big play,” Brock said.

Stravinski currently controls 1.4 million square feet of existing industrial space in the area, including 115,000 square feet of excess industrial space at the former Dey Labs complex under a 25-year master lease from the county of Napa. It’s virtually all full, including the Dey space, recently leased to Top It Off Bottling.

“The market is tight, yet it is very fragile,” Brock said. “This is not, ‘They build it, and they will come.’ … It’s so competitive. We don’t do short-term leases. We don’t want to be exposed to economic hardships.”

EMPLOYMENT GROWS NEARLY 3%

The unemployment rate in the Napa County was 4.1 percent in August, about equal to the 4.2 percent rates of the July revision and in August 2015, according to the state Employment Development Department.

Nonfarm jobs rose 2,000, or 2.8 percent, to 73,900 in the 12 months ending in August. Napa County’s tourism-fueled economy had a huge 9.8 percent job jump over 12 months, up 1,300. Total farm jobs were 5,900, up 300, or 5.4 percent, for the year.

OFFICE VACANCY DROPS

The financial crisis left a number of Napa Valley office suites vacant, particularly in Napa itself, and now the market is on the verge of the opposite challenge, according to Michael Moffett, a Coldwell Banker Commercial Brokers of the Valley agent with 29 years of local experience.

From American Canyon to Calistoga, 4.6 percent of 3 million square feet of office space in properties larger than 5,000 square feet was available for lease, based on CoStar data Moffett cited. That’s down from 9 percent, but the drop is even more dramatic inside Napa. The vacancy rate has plummeted to 4.4 percent from almost 20 percent in 2008, when a number of mortgage-related companies pulled out of the city just as new class A buildings such as Napa Square and The Riverfront reached the market. Instead of demand for 3,000–4,000 square feet, lenders have been looking for local offices of 500–1,000 square feet.

And if the business parks with larger-scale space at the south end of the city are excluded, availability falls further to 1.8 percent of 1.6 million square feet.

“That scares the crap out of me,” Moffett said. “We’re a small-tenant market, and there’s really not anything on the horizon that would accommodate small tenants.”

The typical Napa Valley office tenant shops for 800–1,200 square feet, with regional offices being smaller, and many of the 40–70 leases he brokers a year are about that size. Even if new office buildings were constructed, a significant majority of local couldn’t afford the rents new construction would require.

“If I did 40 leases in the next 12–18 months, there would be no inventory,” Moffett said. “That makes me nervous. Some may want new space. The wine industry is growing, so there is need for back-of-house and sales operations.”

Some of this tightness in the office market in Napa proper comes from the August 2014 earthquake, as city and county departments in quake- and water-damaged buildings had to secure space elsewhere until repairs are complete. He estimates the city’s vacancy rate will grow to 4 percent–5 percent a year from now.

The market for spaces larger than 5,000 square feet in Napa Valley is quite different, and that’s what skews the countywide vacancy higher, Moffett said. In the business parks around Napa County Airport, there are availabilities of around 10,000, 20,000 and 40,000 square feet in buildings not designed to be demised into smaller spaces.

The improvement in the office market peaked around the beginning of this year and may have stalled, spurring off-market proper sales and double-digit increases in rent, Moffett said.

“The latter part of the ride down in the vacancy rate pushed rents up 10 percent to 20 percent, and I think it had started to settle out now,” he said.

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers construction, commercial real estate and wine.