Sonoma County industrial real estate: Cannabis, investors, owner-users propel demand
2016 was a robust year for the Sonoma County industrial real estate market, and all indications are that the strong market will carry over into 2017.
Contributors have been a rebounding economy, attractive interest rates, pent-up demand for industrial land and space from investors and owner-users plus a surge from the new cannabis sector.
For the year, the vacancy rate was 5.8 percent at year-end, unchanged from the fourth quarter of 2015. However, the vacancy rate had dipped to a low of 5.0 percent in the third quarter.
The Santa Rosa City Council’s adoption of a cannabis ordinance has spurred strong demand for suitable space. The heaviest demand was from cultivators, teamed with investor partners. Activity was particularly brisk in sales of industrial buildings located appropriately. The ordinance allows commercial cultivation in light industrial (IL), general industrial (IG) and limited light industrial (LIL) zones located at least 600 feet from defined schools.
Other cannabis uses allowed under the ordinance are to go in the business park (BP) zones. Those uses are manufacturing, including extraction of oils; packaging and distribution; and warehousing.
Prices in 2016 of industrial properties for cannabis uses rose from full asking price - or slightly above - for the first few deals to a 20 percent–25 percent premium above non-cannabis buildings as demand for buildings became fiercer. That premium has increased to 50 percent so far in 2017.
Leasing activity for cannabis-related uses was substantially less than sales activity. Most building owners have loans secured through federally insured banks. Because federal law classifies cannabis as a schedule 1 narcotic, properties involved in cannabis operations are at risk - in the worst-case scenario - of seizure.
Some of the notable industrial-space transactions of 2016 involved cannabis. The largest was the sale of 150,000 square feet in six former Viavi - previously, OCLI and JDSU - buildings to CannaCraft for almost three times the most previous sale price less than a year earlier in April 2015. CannaCraft also leased 34,000 square feet of office and manufacturing space on Circadian Way just prior to purchasing the Viavi buildings.
Another sizable cannabis deal was the leasing of 23,000 square feet to Washington state–based Marley Naturals for a packaging and distribution operation at 975 Corporate Center Parkway in Santa Rosa. There were three other cannabis-related industrial-space sales in the county last year, averaging 24,600 square feet each, plus one of 65,000 square feet near Charles M. Schulz–Sonoma County Airport.
The owner of 975 Corporate Center also leased space to several non-cannabis users last year, bringing deal-making there to almost 59,000 square feet. Such leases included 22,949 square feet to All American Containers for bottle and glass storage and an additional 12,807 square feet to Della Toffola.
Momentum in the cannabis sector accelerated through the end of the year and into 2017, with the county of Sonoma’s drafting ordinance language for cannabis uses. Outdoor cultivation, greenhouses, indoor cultivation and other uses would be directed into the industrial, diverse agriculture and agriculture zones and away from rural-residential (RR) areas.
Michael Flitner (mflitner@keegancoppin.com) and Jim Sartain (jsartain@keegancoppin.com) are partners of Keegan & Coppin Co. Inc./ONCOR International.
