Industrial real estate scarcity drives Sonoma County deals

Sonoma County office and retail real estate have been facing challenges throughout the coronavirus pandemic on when workers and consumers would return, but the local market for space to build, store and ship products continues to hum along.

Sonoma County’s office market during the pandemic has benefited from being farther away from the Bay Area’s densest urban areas, something that proved challenging for recruiters of younger, skilled talent beforehand.

Nineteen months into the dramatic shift in how a number of office-oriented businesses, particularly those deemed “nonessential,” approach remote work, Santa Rosa area offices anecdotally have more people actually working in the leased space than markets traveling south along the Highway 101 corridor, according to Dave Peterson, a partner of Santa Rosa-based brokerage Keegan & Coppin Co. Inc.

“Our agents in Petaluma are not seeing the activity level in office as we’ve seen in Santa Rosa,” he said.

But the Sonoma County market also has not seen the large blocks of office space coming back onto the market for sublease as in San Francisco, Peterson noted.

Office vacancy in Sonoma County moved from 12.2% in the first quarter of last year to 14.1% by the middle of that year, according to Keegan & Coppin. That reversed a slow decline in vacancy since the Great Recession of 2007–2009. Vacancy was 14.4% of 14.8 million square feet in mid-2021, but sublease space amounted to only 0.9%, with most of it in Petaluma.

Companies shopping for office space these days are looking for locations that can be flexible, even accommodating partial remote and in-person work, Peterson said. A hot size requirement is for 5,000–10,000 square feet, but mostly that’s a move to another site, rather than an expansion, he said.

Industrial real estate sizzles from scarcity

Like in Solano and Napa counties, industrial real estate remains one of the hottest commercial property types in Sonoma County. But the shortage of available modern space is a challenge, according to Peterson.

“There’s very little inventory available,” Peterson said. “There are only two or three buildings with over 20,000 square feet available, and we’re seeing prices increasing for sale and rent.”

Only 4.6% of 25.4 million square feet of Sonoma County industrial space was vacant at the end of the second quarter of this year, according to Santa Rosa-based brokerage Keegan & Coppin. That’s down from the pandemic peak of 5.7% at the end of last year but on par with where vacancy was at before the virus.

This tight inventory, together with escalating prices for construction, are pushing rents up 10%–20% in the past 12 months, Peterson said. Some triple-net rents for newer spaces that were around $1 a square foot 12 months ago are now $1.15.

“A lot of buildings on the market are obsolete, without the power needed for equipment or ceiling height for stacking purposes,” Peterson said.

Nowadays, tenants are looking for a clear height of at least 22 to 24 feet in buildings, he said.

Recent deals speak to local industrial real estate market activity. Dermody Properties leased 29,000 square feet at its newly built LogistiCenter project in Rohnert Park to heating, ventilation and air conditioning supplier Ferguson.

Billa Enterprises is in escrow to sell its most recently completed 70,000-square-foot warehouse at the Billa Landing development near Charles M. Schulz–Sonoma County Airport to an affiliate of the undisclosed company planning to occupy it, according to Peterson, part of the listing team. The first two buildings built, each with 45,000 square feet, are fully occupied. The site for the last two buildings, with 70,000 and 140,000 square feet, is being prepared for construction to start on one or both soon because of demand, Peterson said.

Just to the north, along Airport Boulevard leading to the airport, Airport Business Center is working on building a 161,000-square-foot warehouse for Amazon on 41 acres.

The e-commerce giant has said little about what it plans to do there, but it would be on the small side of its distribution facilities, which tend to have several hundred thousand to a few million square feet, like the 617,000-square-foot fulfillment center under construction in Vacaville.

The retailer opened a 201,000-square-foot “last-mile” delivery station in American Canyon this summer and has proposed to put one in the already completed 250,000-square-foot Victory Station project just south of the city of Sonoma. These hubs are where Amazon takes packages that it intends to deliver with its own fleet of trucks, which until the Napa Valley station opened had to travel to North Bay addresses from the East Bay.

The Victory Station site is undergoing further review by Sonoma County officials after objections raised by local residents over traffic led to the approved use being re-examined as a “freight terminal.”

Strong retail concepts drive the market

Sonoma County retail real estate continues to work through the inventory of space that came on the market at the beginning of the pandemic. The overall vacancy rate shot up from the sub-5% level where it had been for several years to 7.2% in the first quarter of 2020, and rose to 8% of 18.6 million square feet in mid-2021, according to Keegan & Coppin.

Though restaurants were hammered by repeated public health closure orders for months over the first 12 months of the pandemic as cases rose, those concepts that quickly adapted to the new takeout, curbside dining and delivery model did as well or better than before, according to Jennifer Hibbitts, a retail real estate specialist for Cushman & Wakefield.

“Food is a very strong category in Sonoma County,” she said. “And boutique fitness (providers) are out looking for space in Marin and Sonoma and Napa (counties).”

A nationwide trend in retail property pre-existing the pandemic is that open-air shopping centers are having better traction with tenants and investors than enclosed malls, and that has only accelerated amid consumer concerns about the virus and changing levels of local government restrictions on business activity intended to control the spread, Hibbitts said.

That trend is playing out at North Bay centers. Among Sonoma County’s regional shopping centers, the only two that are significantly enclosed are Santa Rosa Plaza and Coddingtown, which started out as an open-air mall.

Vacancy for Santa Rosa Plaza was 18.3%, or 127,000 square feet, in mid-2021, according to Keegan & Coppin. But a good portion of that available space is in the former Sears anchor store, which closed in 2018 and is now planned for redevelopment as an 18-story new home for Sonoma County government offices.

Coddingtown, on the other hand, is a mixed situation. A number of spaces accessible via the inside corridor are vacant but amount to less than 9,000 square feet, or 0.9% of the mall’s 960,000 square feet, according to Keegan & Coppin. But work has been progressing for the past few years to add more outdoor access to stores, and those spaces are in demand, Hibbitts said.

“It’s compounding the situation with COVID, as consumers do not want to go inside a mall to go shopping,” she said. Sonoma County re-instituted its pandemic indoor mask mandate in early summer and expects that will run through early next year, depending on case metrics.

Another indicator of strength for in-demand Sonoma County open-air retail is the 292,000-square-foot Montgomery Village center in east Santa Rosa. It sold to WS Development for $93 million, or $318 a square foot. It had no available spaces to lease at the end of the second quarter.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.