Big Napa-Solano industrial projects get pre-leasing, while office market hit hard by virus
The office markets in Napa and Solano counties have been significantly impacted by the pandemic, affecting vacancy and rents. Meanwhile, nearly 2 million square feet of new industrial developments are underway, and a majority of that space is spoken for.
The Napa County office inventory totals just shy of 1.6 million square feet, stretching from the Napa County Airport area north to St. Helena. Like other office markets, Napa has experienced challenges since COVID-19 started, with rising vacancy and decreasing rents and leasing activity.
The total net absorption of Napa County office space for 2020 was negative 136,588 square feet. For comparison to 2019, the net absorption total was at negative 14,528 square feet.
The fourth-quarter 2019 office vacancy rate for the county was at 5.6%, and over the duration of 2020 it rapidly increased to 17% by year-end 2020, with several significant subleases hitting the market.
Many of these subleases have been directly due to COVID-19, as some companies have elected to have their employees work from home. We anticipate this trend to continue during 2021.
Without any material leasing activity in the office marketplace, it’s difficult to assess at this stage exactly how far class A and B office rents have decreased on average since the start of the pandemic. Very few office leases transacted in 2020 since it started in March.
Based on the small sample size of lease transactions, it does appear that Napa County office rents are heading downward. Since March 2020, rental rates have fallen on average approximately 15% for all class types. Rents for class A space downtown are $3–$4 per square foot per month on a triple-net basis, and rents in south Napa are $1.45–$1.65. Rents for class B downtown space are $2–$2.35, and in south Napa $1.05–$1.25.
In Solano County, office inventory is about 3.8 million square feet in Vallejo, Fairfield, Suisun City and Vacaville.
The same negative office marketplace trends in Napa County have impacted Solano. With a lack of any significant tenant demand since the start of COVID-19, the market experienced a net absorption of negative 45,968 square feet, compared with positive 23,252 square feet in 2019.
The fourth-quarter 2019 Solano office vacancy rate was 10.9%, and over 2020 it rapidly increased to over 14.5%. We anticipate vacancy to continue to rise during the first two quarters of 2021.
Solano office rents fell by an average of about 10% for all class types last year. Class A space monthy rents are $2.25–$3.15 per square foot on a full-service gross basis, and class B rents are $1.85–$2.10.
For the select few active deals in the office market, most of the demand is focused in the Fairfield-Green Valley and Vacaville submarkets. We expect Solano submarkets to hold up a little stronger during this rocky period with COVID-19 than some of the other surrounding Bay Area office submarkets.
Here are notable Napa and Solano office transactions for 2020: Par Electric Contractors leased 14,144 square feet in Vacaville at 810 Vaca Valley Parkway; Tapp Label expanded by 5,293 square feet in south Napa at 570 Gateway Drive; and Ag Health Benefits Alliance leased 2,437 square feet at 5 Financial Plaza in north Napa.
The demand for investment and owner-user sales fell off significantly throughout 2020. The only substantial office building sale to mention includes a leased investment sale of 5 single-story office buildings totaling 81,182 square feet at 421 and 427 Executive Court North in Fairfield. This was purely a value add play as the buildings had significant vacancy and exposure to short term rollover.
Industrial markets remain strong, even with new projects
Napa and Solano industrial real estate market activity remained strong, and momentum for tenant demand and deal velocity steadily increased in late 2020.
The current inventory of warehouse, production and light-industrial space is just over 14.5 million square feet in Napa County and over 39 million square feet in Solano.
The industrial market has not missed a beat since the start of the COVID-19 pandemic. In fact, demand and deal velocity remained steady during the second and third quarters of 2020, really took off in the fourth quarter and has been extremely strong during the the first quarter of this year.
Key factors for increasing industrial demand includes local, national and global markets rapidly shifting to e-commerce and the continued growth in the food and beverage industries. Tenant demand in Napa and Solano counties continues to consist of regional wine, food, and beverage-related production, e-commerce and packaging companies. Solano continues to benefit from tenants that are priced out of the East Bay submarkets and, instead, are considering more affordable space options in Solano and Napa counties.