Demand for e-commerce, logistics propels Solano-Napa industrial real estate deals

The industrial real estate market in Solano and Napa counties has flourished since the start of COVID-19, while the office market in those counties has struggled.

In fact, industrial demand and deal velocity grew substantially in the first through third quarters of 2021 and finished strong through year-end. Key factors for increasing industrial demand include 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 primarily consists of regional wine, food, and beverage-related production, e-commerce, third party logistics operators, and packaging companies. Solano continues to benefit from tenants that are priced out of the East Bay and other surrounding submarkets and instead, considering more affordable space options in Solano and Napa counties.

Industrial rents in Solano and Napa continue to be about 20% to 30% less than industrial rents in East Bay submarkets.

With the rising costs of construction, limited supply and consistent demand, asking rates are steadily increasing to local record rates in Napa and Solano. Monthly rates for conditioned wine space in Napa and American Canyon (50,000 square feet and up) currently range from $0.85 to $1 per square-foot, per month on a triple-net basis. Light industrial rates for smaller spaces (5,000 to 30,000 square feet) range from $1.00 to $1.20 per square-foot, triple-net. These rates are up more than 10% from the prior year.

In Solano, class A warehouse ranges from high-50 cent to low-80 cent range per square foot per month on a triple-net basis for larger spaces (greater than 100,000 square feet).

The wide range is primarily due to a substantial availability of new product and that was delivered in Vacaville through new construction, with rates still hovering in the high-50 cent to low-60 cent range NNN. Fairfield on the hand, is experiencing much higher rates for larger space ranging from the mid-70 to low-80 cent range NNN. Smaller, light industrial space in Solano between 5,000 to 25,000 square feet range from the high-70 to low-90 cent range, depending upon the amount of necessary office build-out.

The Napa and Solano markets have over 3.5 million square feet of active user requirements targeting occupancy over the next six to 12 months. Most range from 75,000 to 200,000 square feet, along with a handful seeking 250,000 to 600,000 square feet.

The market barometer that best illustrates the substantial leasing activity in Napa and Solano has been the “year over year” staggering net positive absorption figures since March 2020: 1,875,381 square feet in 2021 and 2,156,972 square feet in 2020. By comparison, the positive net absorption for 2019, was just 201,393 square feet.

Napa County has 14.8 million square feet of warehouse, production, and light industrial spaces, and Solano, 38 million square feet.

Industrial vacancy in Napa County has remained consistently low, currently at just 2.6%. Just about all that vacancy (360,000 square feet) is in one newly constructed 702,000-square-foot building located at 400 Boone Road, American Canyon.

Solano industrial vacancy decreased even with the substantial amount of new warehouse construction that was delivered to Napa and Solano as mentioned below. The year-end 2021 vacancy in Solano County was at 4.2%, which is down from 4.7% at year-end 2020. With the ongoing tenant and owner-user demand, we expect the supply of industrial product for both markets to stay limited throughout 2022.

New developments largely pre-leased

Over 1.7 million square feet of new developments are coming to Napa and Solano counties. The projects are driven by tenant demand, shown by more than half the space being pre-leased. Several new construction projects were delivered in 2021, and more are scheduled for 2022 in Napa and American Canyon.

The Pigman Company, Kraemer Land and Cardinal Development delivered phase 3 at Napa Commerce Center, a 79,943-square-foot class A warehouse facility at 502 Devlin Road in Napa that broke ground in summer 2021. That project will also soon have groundbreaking on buildings A, B and E, which total 85,880 square feet of light industrial product in three buildings.

Orchard Partners, Divco and RREEF delivered the 201,950-square-foot build-to-suit warehouse at 300 Boone Drive for an e-commerce company — reportedly, Amazon — and completed a 702,000-square-foot speculative warehouse space that is 50% leased to Biagi Bros. Inc. Innova delivered a two-building light-industrial project totaling 64,000 square feet at 115 and 125 E. Gateway Road in south Napa.

There are a substantial number of projects in Solano underway or recently completed.

Panattoni Development Company’s class A warehouse development is under construction on Business Center Drive (Green Valley Corporate Park) in Fairfield, a three-building project totaling 415,107 square feet that will be delivered in summer 2022. Dermody Properties is breaking ground in March on a five-building class A distribution warehouse project totaling over 700,000 square feet at the corner of Beck Avenue and Cordelia Road in Fairfield.

Buzz Oates just completed a two-building class A warehouse project at 1051 Aviator Drive and 2041 E. Monte Vista in Vacaville, totaling 509,655 square feet.

Phelan Development completed a three-building class A warehouse project totaling 496,541 square feet named Fairfield Commerce Center on Huntington Drive in Fairfield.

LDK is currently under construction on a 617,000-square-foot class A warehouse that has been pre-leased to an e-commerce company — reportedly, Amazon — at 4800 Midway Road in Vacaville. There also a 93,240-square-foot industrial building that has been pre-sold to an undisclosed owner-user.

These developments are barely keeping up with demand, as industrial inventory in Solano County remains extremely scarce. The appetite for industrial development has created a very limited supply of industrial land in both Napa and Solano, as developers are aggressively snapping up any remaining land sites at record pricing levels. Land values has jumped by over 20% in Napa and Solano over the duration of 2021 compared to previous year.

Deals for warehouses

The most significant industrial leases in 2021 for Napa or Solano include the Hydrofarm lease of 175,404 square feet at 2225 Huntington Drive in Fairfield; Caymus-Wagner Family Wines lease of 176,760 square feet at 2875 Cordelia Road in Fairfield; Santa Clara Warehouses leased 226,892 square feet 2200 Courage Drive in Fairfield; Vici Collection leased 151,513 square feet at 2200 Courage Drive in Fairfield; Plygem leased 250,000 square feet at 2041 Cessna Drive in Vacaville; M7 Wine Solutions leased 79,943 square feet at 502 Devlin Road in south Napa.

Investment demand is robust for leased investment and owner-user sales and it remains a big challenge for buyers to locate quality industrial product to purchase. Here are notable sales in 2020 and 2021:

• LBA Realty bought a 100% leased two-building warehouse project totaling 266,729 square feet at 75 and 89 S. Kelly Road in American Canyon.
• Lowenberg Corporation, a 100% leased multi-tenant warehouse totaling 107,111 square at 1560-1570 Airport Blvd. in Napa.
• DRA Advisors, a 100%-leased 843,248-square-foot class B warehouse building at 700 Crocker Drive in Vacaville.
• Westcore Properties, a multiple building portfolio from USAA, including a 378,000-square-foot warehouse building at 2200 Courage Drive in Fairfield.
• Link Logistics, a 100% leased 330,750-square-foot distribution warehouse at 5191 Fermi Drive in Fairfield.
• BentallGreenOak, a 100% leased 607,208-square-foot distribution warehouse at 5195 Fermi Drive in Fairfield.

COVID dampens office market

Napa has experienced ongoing challenges since COVID-19 started, with rising vacancy rates, decreasing rents and limited leasing activity.

Napa County has just shy of 1.6 million square feet of office inventory, stretching from the Napa County Airport area and north to St. Helena. Like other office markets, The total net absorption for 2021 was negative 77,879 square feet. By comparison, net absorption in 2020 was a negative 95,539 square feet.

During 2021, Napa County office vacancy rose to 19.4% by year-end from 14.5% in the fourth quarter of 2020, with with a few additional subleases and direct leases hitting the market.

Solano office space has weathered the pandemic slightly better than Napa, due to its central location on Interstate 80 between Sacramento and the San Francisco Bay Area and its rapidly growing residential base.

Solano has about 3.8 million square feet of offices in Vallejo, Fairfield, Suisun City and Vacaville. Vacancy barely changed in 2021, ending the year at 14.8%, up from 14.5% at the end of 2020.

The county experienced a slight increase in tenant leasing activity in 2021, compared with the previous year. Year-end net absorption was negative 5,419 square feet, up from negative 35,854 square feet in 2020.

Napa Valley office vacancies are directly related to the ongoing effects from COVID-19. Several companies have elected to downsize their office footprint long term and allow employees to continue working from home. This decision has led to tenants not renewing leases or simply vacating and putting their office on the market for sublease. Despite this trend, a few firms in Napa are electing to re-occupy their premises after testing the sublease market, most recent example is Treasury Wine Estates at 555 Gateway Drive.

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. Even so, it does appear that rents are heading downward. Rents for class A space in downtown range from $3.25–$4.00 per-square-foot, per month, on a triple-net basis and rents in south Napa range from $1.25–$1.50 per-square-foot. Rents for class B space in downtown range from $1.90–$2.30 per-square-foot, per month, on a triple-net basis and in south Napa rents are in the $1.05–$1.25 range. Since March 2020, rental rates have fallen on average approximately 20% for all class types.

Solano office rents have fallen during the last year on average approximately 10% to 15% for all class types to meet the market. Rents for class A space in Solano range from $2.20 to as high as $3.25 per-square-foot, per month on a full-service gross basis for the best located assets. Rents for class B space range from $1.85–$2.10 per-square-foot (FSG).

For the select few active deals in the office market, most of the demand continues to be focused on the Green Valley and Vacaville submarket areas in Solano. The Fairfield/Solano office marketplace will likely continue holding up a little stronger compared to some of the other surrounding office submarket regions in Bay Area with ongoing demand for medical related uses, government services and non-profit agencies.

Here are notable office transactions in both Napa and Solano for 2021:

• North American Mental Health Services leased 10,979 square feet in Fairfield at 500 Chadbourne Road.
• Aldea Counseling Services leased 8,441 square feet in Fairfield at 4820 Business Center Drive.
• MPL Brands Inc. leased 5,030 square feet and HealthFlex leased 3,370 square feet in Fairfield at 4830 Business Center Drive.
• Amizetta Winery leased 3,196 square feet in south Napa at 870 Napa Valley Corporate Way.
• St. Helena Hospital leased 6,706 square feet in south Napa at 851 Napa Valley Corporate Way.

The demand for investment and owner-user office sale activity has continued its decline since March 2020. A few substantial office building sales to mention include DLME Investments (investor) acquisition of 1745 Enterprise Drive in Fairfield, a two-story office/flex building totaling 96,431 square feet; Renteria Vineyard Manager (owner-user) purchase of 462 Devlin Road in south Napa, a 1-story office building totaling 5,030 square feet.

Going forward, we expect to experience a slight increase in demand for the Napa and Solano office markets toward the latter part of 2022 due to some companies requiring employees to re-enter their offices to increase collaboration, productivity levels and rebuild their company culture.

Chris Neeb, Matt Bracco and Glen Dowling are part of The Dowling-Bracco Team at JLL.