Petaluma commercial property market may be reaching balance point

Lease originations for Petaluma industrial properties were down significantly in 2022 — only eight for the year.

Some of these were quite large, notably Gibson Brands’ 10-year lease of 62,000 square feet at 755 Southpoint Blvd. Out of the eight leases, half were over 20,000 square feet, while the total square footage leased was about 193,000.

This was 34% less square footage transacted than 2021, so vacancy increased from 5% at the beginning of 2022 to 7.4% at the beginning of this year.

We’re still in the mid-bull-market range for industrial vacancy, and a user still has limited choices. But it is a little concerning, given the current consumer price index levels and key interest-rate Increases. It’s entirely possible that we’ve reached a balance point between prices and tenant prospects as industrial space seems to be taking a little longer to lease up than last year.

Industrial sales were down as well, totaling 314,800 square feet, down 10.5% from 2021. This was due to the ubiquitous lack of supply.

There were eight sales, of which two were significant: 110,000 square feet at 2249 S. McDowell Blvd. for $25 million and 165,000 square feet at 3800 Lakeville Highway for $32.5 million.

There were fewer Petaluma office leases last year, while the actual square footage was almost identical to 2021. Of the 26 office leases inked in 2022, the largest was a renewal by Enphase Energy of 24,000 square feet at 1420 N. McDowell Blvd.

When compared to the roughly 40 office deals in 2021, last year’s tally sounds somewhat disheartening, but it wasn’t. In 2021 those leases totaled 104,457 square feet, with an average lease size of 2,611 square feet. The 26 leases inked in 2022 virtually had the same amount of square footage,104,554, so the average size rose to 3,872 sf.

This indicates that leases signed represent a higher employee count — much easier to track in office deals than warehouse — which seems in line with the current labor statistics.

Office sales in Petaluma were primarily user-style deals. Only seven sales occurred last year, and none were over 2500 square feet. The smaller the space, the more expensive it is per square foot. The clear highwater mark for small office sales was 515 B St., at a reported $816 per square foot.

We are subject to national trends, but the Bay Area is one of the trend-setters so we’re partially responsible for those trends.

Tech layoffs are in line with general belt-tightening across the board. Some sectors are immune to that practice, and some employers are demanding in-person productivity as it’s easier to monitor. But remote working is here to stay, and that will continue to reverberate through the office sector.

The office market will find it’s equilibrium, and those spaces will lease up, just not at the hectic clips we’ve seen in the past.

Once we account for other commercial sectors, 2022 was an active market for Petaluma. The lot at the corner of North McDowell and Corona has been approved for the new North Petaluma SMART station. This led to the sale of 6.56 acres at 890 N. McDowell for multifamily development, selling for $10.63 million. In total, there were seven land deals for multifamily, retail and mixed-use projects.

Retail sales were largely focused on institutional investments. Out of the 20 retail properties sold, 12 were part of a single transaction at Deer Creek Village, between seller Merlone Geier and New York-based Fortress Net Lease Income Fund.

The city is addressing some long-standing infrastructure issues with the North McDowell Boulevard improvement Project. Caltrans also is diligently constructing the widening of Highway 101 through Petaluma. Once the North Petaluma Rail Station is completed we’re going to have an essentially revitalized northern corridor.

The as-yet-not-started Rainier cross-town connector should sufficiently mitigate traffic increases along central Petaluma traffic arteries.

While we might be experiencing near term headaches, there is a light at the end of this current situation. Increased circulation will only positively impact Petaluma. So our modest portion of existing trends will help the region emerge triumphant against current challenges.

Petaluma is, and will remain, the little town that could in the North Bay.

James Manley is a senior adviser at Keegan & Coppin Co. Inc. (keegancoppin.com).