Supply limits brisk Petaluma industrial real estate deals

Industrial real estate lease originations in Petaluma were up modestly over 2020, tamped by restricted supply along with pandemic hurdles.

However, actual absorption — what’s no longer available — dwindled our supply significantly. We started 2021 with 8.3% vacancy (direct and sublease) and started 2022 with 5% vacancy (direct availabilities only).

Anything beneath 10% favors the landlord, but 5% can cost them due to lack of options.

The two largest Petaluma Industrial leases were both on Cypress Drive in the Oakmead Northbay business park (MILwright leased 35,800 square feet at 3810 Cypress and Juice Beauty, 22,049 square feet at 3925 Cypress).

Nine leases were above 10,000 square feet. Prices experienced a decent uptick as well. The most interesting anomaly is that each one of the reported leases were lease originations with no renewals.

That doesn’t mean renewals didn’t occur, but they were not reported. We’re way beneath a robust inventory. This signals increased industrial rent, but it will be modest unless more inventory becomes available. The price will increase on a more aggressive curve as new supply comes online and will continue to do so until we hit an 8% industrial vacancy.

There were 38 new office leases and two subleases during 2021. This is almost identical to the number of office leases for all of 2020. Actual reported prices ranged from a low of $12 per square foot on a net-lease basis up to $30 a square foot on a multi-tenant gross basis, or monthly rates of $1 and $2.50, respectively.

But those numbers are not canon, as many property owners don’t share or report rates. I would venture that lease rates remained essentially flat, compared with 2020. Our office vacancy at the end of 2021 is reported at 18.6%, down a dismal 0.1 percentage point from the end of 2020. All but a couple of these deals were under 5,000 rentable square feet.

At the time of this writing, there is increased demand for office space. It is modest, but it will likely accelerate throughout the year.

Petaluma was highly active with sales. There were 66 reported actual (non-refinance or estate assignment) sale transactions. That is a 314% increase over 2020. Altogether, there were eight flex-style buildings, 11 industrial buildings, seven land sales, two multifamily sales, and 11 office sales.

The Professional Financial Investors portfolio (62 properties in total in Sonoma and Marin counties) closed with Hamilton Zanze & Company. investing heavily in the North Bay. Retail saw 24 additional properties exchange hands (including portfolio sales).

Some long-vacant, on-and-off-again properties traded as well. Prices across all sectors ranged from $113–$475 per square foot. There were a handful of industrial/flex type condos sold on Scott Street, Industrial Avenue and Technology Lane. Prices for these types of transactions dipped at the beginning of the third quarter but picked up toward the end of the year.

The 10-year T-bill rate has climbed sporadically over the last six months with the steepest rise coming since the holiday season. The three-year rate has climbed steadily since October. Those yield curves encourage the Fed to increase rates.

Fuel prices are dramatically higher. Durable and non-durable supply is dramatically lower.

All these developments work together to accelerate inflation. If the federal reserve increases incrementally through the year, sellers are going to have to calibrate their expectations in real time. But there is an emerging way to participate in CRE investment for both buyers and the sellers.

Because it uses distributed ledger technology (essentially an open ledger), I project more interest in blockchain commercial real estate investment for tokenized properties.

This new approach is going to open the door for people priced out of REITs or single-owner investments. People will still need to familiarize themselves with commercial real estate as an investment vehicle before jumping in, but it’s not subject to the rapid volatility inherent to cryptocurrencies. The technology can be intimidating, and markets are slow to adapt to new concepts, but it is happening and will eventually be fully embraced.

James Manley (707-664-1400, jmanley@keegancoppin.com) is a senior real estate adviser for Keegan & Coppin Co. Inc. in the Petaluma office.