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One of the hottest product types in Sonoma County commercial real estate for the past few years remains industrial space, with growing demand from makers of specialty agricultural products beyond wine and dairy.

Trouble is, the county may be running out of places to locate businesses that need to produce, process, package, store and ship premium goods such as craft beer, hard cider, gourmet foods and, lately, cannabis, market experts say.

The countywide vacancy rate for industrial space was 5.6 percent of 24 million square feet in June, according to Keegan & Coppin Co. Inc./ONCOR International. But as low as that availability is overall — 10 percent vacancy is a rule of thumb for a market balanced between supply and demand — it’s even lower for new space and properties with the right land-use allowances.

“If you look at the inventory of space for lease or sale, there is very little inventory,” said Keegan & Coppin partner Rhonda Deringer. “Developers are marketing land available for build-to-suits [leases], but that could take a year or two, depending on where it is and in what stage of development.”

The largest industrial projects under construction in Sonoma County urban areas are fully preleased to growing Petaluma companies. Construction on the nearly 260,000-square-foot Cader Corporate Center project just off Lakeville Highway in south Petaluma started in February and set to wrap around the end of the year.

But 58 percent was already committed to Clover Stornetta Farms for a dairy products warehouse and Scott Laboratories for one to hold supplies for making wine, beer and cider, according to Steven Leonard, part of the Cushman & Wakefield team marketing the project.

Hydroponics equipment developer and distributor Hydrofarm this fall inked a deal for the rest of the project.

The other big industrial project under construction is a production facility Airport Business Center is building on Mitchell Lane in Windsor for Santa Rosa’s Russian River Brewing. It’s part of a couple dozen-acre extension to the 263-acre business park east of Charles M. Schulz–Sonoma County Airport. A 50,000-square-foot custom winery also is being proposed there, fitting with the DuMol and Marcassin boutique wineries built there in the past few years.

In the offing is a 40,000-square-foot industrial building on Lakeville Highway in Petaluma recently approved for Labcon to expand local operations.

DEMAND FOR CANNABIS

About a year ago, California enacted the Medical Marijuana Regulation and Safety Act, or MMRSA. It created a legal framework for local governments to say where various aspects of the business from crop to dispensary can happen. And California voters in November will decide whether recreational use will be allowed.

These legal shifts have spurred a real estate rush in the state. Santa Rosa’s evolving land-use policy to allow certain operations in certain locations has made the city a focus of leasing and purchase activity related to the burgeoning industry, as other North Bay cities have taken a pass on such allowances.

“Owners can get premium rents for those uses, because of the risk level,” Deringer said. “It will affect fair-market rents for industrial properties in the county, especially in Santa Rosa.”

LAND RUNNING OUT?

The county currently has nearly 4,000 acres of land designated for industrial uses, according to a recent tally by Keegan & Coppin. Roughly 70 percent of that land has been built upon, leaving around 1,200 acres vacant, the Santa Rosa-based brokerage figures.

“If we build out or absorb 75 acres a year, we have only 16 years left of industrial or office land,” wrote Al Coppin, president, in the report. “When the county wants to put more land into open-space corridors, this limitation of land for industrial needs to be factored in.”

He argued that the long-term health of the economy could be restricted if the supply of land for industrial, office and commercial space dwindles.

But it’s not just local land-use policy complicating the supply of business space, Coppin wrote. Evolving state and federal regulations for protected species — namely, the California tiger salamander — wetlands, energy-efficiency and climate impact are contributing to higher construction costs and longer development and building timeframes.

That cost and time impact was underscored recently for Brondi Development, which has been developing the 83-acre Westwind Business Park for three decades, according to Keegan & Coppin partner Jeffrey Wilmore, who has been marketing Brondi property there with Dave Peterson for 14 years.

Eighteen months ago, 22 acres of industrial land with entitlements were marketed for sale, and that’s when it became clear that a previous OK from federal regulators about any impact on that endangered salamander was no longer OK for state regulators.

“Westwind had a clear letter of no effect from the Fish & Wildlife Service years ago,” Wilmore said. “Department of Fish & Game came in recently and said the situation has changed.”

Brondi had to purchase credits at a local habitat mitigation bank at a cost of about $500,000, adding 52 cents a square foot to the purchase price paid by Billa Management in May.

The Santa Rosa-based real estate developer and investor has early plans for up to 374,000 square feet of industrial space on five sites, and is marketing it via Danny Jones of Keegan & Coppin. The property already has two pads prepared for construction of 45,000-square-foot buildings.

CONVERSION TO INDUSTRIAL

The Brondi family is looking to close out its development in Westwind with the sale of 12 acres of land along Airport Boulevard at North Laughlin Road, Wilmore said.

The property was positioned for three office buildings in the high-technology boom of late-1990s, but the effort only got as far as building pads being constructed for them several years ago before the office market slowed.

Interest in the property of late has been for industrial uses. Russian River Brewing had been planning to put the plant there before shifting it to the site less than a mile north. Now a prospective buyer has been talking with county planning officials about whether it could become an industrial project and got an initial green light.

“One of the keys to that is Napa, which has the newest warehouses,” Wilmore said. “They’re beautiful with stone on the outside and vineyard trellises, and they envision doing something like that on Airport Boulevard, because it’s the gateway to the airport.”

Airport Business Center recently purchased 24 acres of land along Airport that was being entitled for warehouses.

Other active industrial projects in the county are near Sonoma.

Victory Station by a development consultant involved with Cader, José McNeill, is set to start construction on 260,000 square feet at the corner of Eighth Street East and Highway 121 next spring.

In Carneros Business Park farther up Eighth Street East, the developer or more than 1 million square feet of warehouses on the street, Vintage Enterprises, has secured a site to build a couple hundred thousand square feet of winery-oriented space.

PRESSURE ON PRICES

Industrial rents and sale prices are rising faster in Petaluma than in other parts of the county and for new construction, much of which had been happening there. Rents drop 5 percent–10 percent in cities to the north, according to Deringer of Keegan & Coppin.

“We’ll definitely see an increase because of competition,” she said. “It’s supply and demand.”

Sale prices for larger spaces in Petaluma have jumped, according to Leonard of Cushman & Wakefield.

“Rents have gone up 20 percent in the past 12–18 months, and valuations on buildings are up as much as 30 percent,” he said.

But there is a limit to the escalation, said James Manley of Keegan & Coppin.

“Some are leaning on pricing from historical desperate deals in buyers being willing to overpay for industrial,” he said.

Banks are looking hard at deals, and paying anything beyond $120-$130 a square foot is hard to make work financially, he said. Some larger spaces are fetching $110, but the market is really $100, especially considering office space can get $130.

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