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Significant Napa Valley office space is becoming harder to find and more in demand, while big warehouse spaces in Napa and Solano counties are getting leased up soon after built, with even more projects in the offing.

The bulk of Napa County’s office and office-flex markets have about 1.9 million square feet. The northern Napa Valley market — downtown Napa through St. Helena — is tremendously active, with several large retail and hotel developments underway.

The Archer Hotel project, consisting of five stories and 183 rooms, will be the center of a new mixed-use development including 40 shops and restaurants. Meanwhile, just five miles south at Napa Valley Commons Business Park, the Meritage Hotel has broken ground for the addition of 145 hotel rooms, a demonstration kitchen, an outdoor lawn area, wine tasting rooms, and a market for guests. The Culinary Institute of America acquired the former Copia Center of Wine Food & Arts 78,000-square-foot building at 500 First St. in Napa in downtown Napa. The delivery of these additional amenities and services, anticipated for mid-2017, will continue driving up asking rental rates in downtown Napa and surrounding business park areas.

Downtown Napa is only getting tighter and rents are rising, with vacancy at just under 4 percent and rents for class A office space currently are $2.25–$3.50 per square foot on a triple-net basis.

Over the past 24 months, tenants have been migrating toward the southern end of Napa in search of more reasonable rents and better availability available. Vacancy in south Napa has tightened to around 10 percent. This should continue well into 2017.

Demand is pushing up south Napa office rents. Rates for class A buildings are $1.25–$1.75, triple-net.

Tenant touring of space options picked up considerably at year-end and so far in the first quarter. Most notable among several new requirements is demand for space over 10,000 square feet. That suggests office demand could remain steady this year.

NOTABLE OFFICE DEALS

Several notable office lease and sale transactions have occurred in the last few months. Naked Wines leased 10,350 square feet at 135 Gasser Center Drive in South Napa Center Century Center, where a 19,000-square-foot retail and office building is under construction. At 860 Napa Valley Corporate Way in Napa Valley Commons business park, Busch Firm leased 6,200 square feet for expansion.

Office investment and owner-user sales have been steadily gaining momentum over the past 36 months. DR Stephens purchased LBA Realty’s 860 and 870 Napa Valley Corporate Drive in Napa Valley Commons. This project includes two single-story office-flex buildings with 68,000 square feet, and it was 70 percent leased at time of sale.

Marcel Schurman/Papyrus acquired 240 Gateway Road W., which is a 39,000-square-foot single-story office building, relocating the Fairfield operation to Napa. This building was formerly home to Diageo Chateau & Estate, which vacated several months earlier.

RPE Plum and Gethead acquired three single-story office buildings at 211 and 221 Gateway Road and 477 Devlin Road, totaling 32,400 square feet. They were about 90 percent leased at the time of sale.

NAPA VALLEY INDUSTRIAL

The current industrial real estate inventory in Napa County totals more than 13.6 million square feet of warehouse, production and light industrial space.

Asking rates continued to rise, which are being fueled by strong demand, escalating cost of new construction, land prices and substantial increases in building permits and fees. Monthly rates for conditioned wine space – if you can find it – currently are 65–85 cents a square foot on a triple-net basis for smaller spaces, under 40,000 square feet.

Demand remains strong, with a little over 5 million square feet of active user requirements targeting both Napa and Solano counties. Most requirements are 75,000–250,000 square feet, but some need as much as a 1 million square feet. Prospective tenants are regional food- and beverage-related, e-commerce, packaging and furniture companies.

Many tenants looking to expand in the area are left waiting due to extremely scarce availabilities. So tenants are looking for space three to four quarters in advance, on average.

Industrial vacancy rates started at about 1.0 percent in the beginning of 2016, increasing to 5.5 percent by the end of the year, due primarily to newly completed space. At 1 Middleton Way in American Canyon, a 646,000-square-foot warehouse was finished in the second quarter of 2016 and accounts for 4.2 percent of the currently vacant space. There are several proposals pending at this property, and we expect it to be fully leased by the end of the third quarter.

Although there are several other buildings in the planning stages, other large current availability is 60,000 square feet at 1245 Commerce Blvd.

WAVE OF PROJECTS

Six projects may get underway this spring or summer in Napa County. ICC/Stravinsky is under construction on a 268,000-square-foot building at 450 Green Island Road in American Canyon, preleased to WineDirect. IDS Real Estate Group is nearing completion on a speculative 80,000-square-foot warehouse at 1225 Airport Blvd., the final building at Greenwood Business Park.

The Pigman Companies intends to break ground on Napa Commerce Center this spring. It is planned for more than 390,000 square feet of warehouse and industrial-flex buildings.

Buzz Oates Group of Companies also intends on breaking ground this spring on a 116,000-square-foot warehouse on Green Island Road in American Canyon. Channel Properties plans to construct a 104,000-square-foot warehouse in Napa Valley Gateway Business Park in late summer.

And finally, Panattoni Development’s intends on breaking ground just south of the Napa County Airport on the Napa Airport Corporate Center multiwarehouse project with over 670,000-plus square feet.

At least 650,000 square feet of new product likely will be constructed this year for fourth-quarter delivery.

INDUSTRIAL DEALS

Top It Off Bottling leased 110,000 square feet at 2751 Napa Valley Corporate Drive in Napa Valley Commons business park. Wine Country Cases purchased a 78,000-square-foot building located at 621 Airpark Road near Napa Airport for immediate expansion.

Demand for investment sales remains strong. Investors have continued to demonstrate a willingness to pay a premium for high-quality assets, as evidenced by New York Life’s sale of Greenwood Business Park project to IDS Real Estate Group at a sub-6 percent capitalization rate. Greenwood includes a 226,000-square-foot warehouse leased to Adam Wine Group along with a fully entitled planned 80,000-square-foot warehouse.

SOLANO OVERVIEW

In November, Buzz Oates started construction on a 321,651-square-foot warehouse in Vacaville Business Park, while the Gateway80 Business Park in Fairfield is well underway with 861,000 square feet in two warehouses to be completed by the end of the second quarter.

These developments come at a crucial time, as Solano County submarkets are becoming attractive for tenants looking for large blocks of space, an option that is scarcely available in nearby markets. Of the 5 million square feet of tenant demand targeting Solano and Napa counties, it is important to note that approximately 70 percent of these users are requiring spaces greater than 100,000 square feet.

FALLING VACANCY IN NEIGHBORING COUNTIES

The tight market conditions in the East Bay and Napa Valley are driving industrial leasing activity of new developments in the Solano County. Vacancy rates have fallen for the eighth consecutive quarter, now sitting at 3.2 percent overall in Solano County.

Of the three speculative buildings currently under construction, two have been fully preleased. Berlin Packaging and a major undisclosed food manufacturing company have leased the two 430,500-square-foot buildings in Gateway80 Business Park, leaving only 580,259 square feet of warehouse space currently available in Fairfield.

NOTABLE SOLANO TRANSACTIONS

In addition to the two Gateway80 leases, other notable transactions included a 168,000-square-foot expansion and long-term lease at 589–635 Indiana St. in Benicia by DC Solar, which will be used for storage of modular solar panel systems. JF Hildebrand leased a 78,276-square-foot space at 5307 Industrial Way for conditioned cased wine storage.

Olive Oil Factory completed and now occupying their 95,000 square-foot build-to-suit at 2333 Courage Dr. in Fairfield. Calbee Foods leased 38,000 square-feet at 2445 S. Watney Way in Fairfield to accommodate raw material expansion needs. Lastly, Amcor Rigid Plastics leased 73,500 square-feet at 801 Chadbourne Rd. in Fairfield.

Glen Dowling, Matt Bracco and Chris Neeb are part of the Dowling-Bracco Team at JLL (dbrea.com).