Marin–Sonoma industrial real estate: Few existing options along Highway 101

The industrial market in the North Bay, focusing here on Sonoma and Marin counties, has been very strong for the last four years. With very limited inventory and relatively limited new construction, we continue to experience falling vacancy rates and rents rising to historical levels.

Since the bottom of the market 2008–2009, we have seen double-digit percentage increases in rents and per-square-foot building sales prices. That has resulted in current historically low vacancies rates and record sales pricing.

This trend is similar to the rest of the Bay Area markets: limited inventory, rising rents, little new construction and high absorption rates, at levels we haven’t seen for decades. Much of the new development projects across the Bay Area are coming out of the ground preleased or leased upon completion with rents higher than existing construction but in most cases less than it would cost to completely redevelop old infrastructure into comparable/new product.

The North Bay industrial market closed 2016 on a strong note. The combined vacancy rate for Sonoma and Marin counties was 4.0 percent, down from 6.2 percent one year before. Net absorption for the fourth quarter was a healthy 109,000 square feet, up 36,000 square feet from the prior year. Total absorption for the year was more than 333,000 square feet.

Meanwhile, the monthly average asking rent continues to climb and now stands at 90 cents per square foot on a triple-net basis, up from 89 cents from last year. PETALUMA LEADS SONOMA COUNTY

Because of these strong market forces, tenants have been struggling to find quality space, which has resulted in new construction. Petaluma’s first speculative industrial development project in decades, the 268,000-square-foot Cader Corporate Center project in southern Petaluma, was fully leased to four tenants prior to completion: Scott Labs, Clover, Cowgirl and Hydrofarm.

Petaluma has been the center of activity in Sonoma County and ended the quarter with 2.4 percent vacancy, down from 3.7 in the prior year. The average asking rent in Petaluma posted a modest gain from last year, closing at 91 cents, up from 88 cents one year before. The thriving Petaluma industrial market is still being fed by food and beverage companies.

For the rest of Sonoma County, industrial vacancy rate was less than 5 percent. Under construction is 125,000 square feet of space, and another 370,000 square feet is planned. Most of the planned or under-construction new product is preleased or in negotiations to be leased prior to completion.

Food, wine and craft brewing companies remain particularly active throughout the county, along with other local service space users. Yet the cannibis phenomenon could potentially drive vacancies further down and rents even higher.

The Santa Rosa and Rohnert Park markets are similar too. The largest potential development project in the north end of the county is a 20-plus-acre parcel in Westwind Business Park near Charles M. Schulz–Sonoma County Airport. With no quality or significant existing product being available, active tenant requirements for more than 500,000 square feet in the market spurring preleasing of planned projects. If these projects can get through the gantlet of county and/or city approvals, we could see as much as 300,000 square feet of new product being built over the next two years in that submarket.

A significant development project worthy of note is the 249,000-square-foot Victory Station project south of the city of Sonoma, which is being built in a submarket with a 2 percent vacancy rate. The project is in for building permits and spec construction is scheduled to commence May of this year.

Sonoma County closed the fourth quarter with more than 116,000 square feet of net absorption. Vacancy continued to fall and was 4.0 percent overall, the lowest vacancy level we have tracked to date. All three of the county’s submarkets posted lower vacancy and higher asking rents this quarter as conditions continued to tighten.

Due to the incredibly tight conditions in Petaluma, some tenants have looked north to Rohnert Park or east to the city of Sonoma. The recent pickup in activity gave Rohnert Park another strong quarter, posting over 20,000 square feet of net absorption at year-end. The asking rent for Rohnert Park remained $1.05 through the fourth quarter.

Santa Rosa also posted strong numbers in the fourth quarter, with 169,000 square feet of net absorption. The average asking rent nudged up to 75 cents, and vacancy rate improved to 4.7 percent down from the prior year 9.7 percent

ECONOMIC DRIVERS

Major drivers of North Bay industrial real estate activity have been the quality of life and job growth, which are feeding the organic market growth. Tightening markets in San Francisco will continue to push the workforce as well as users of industrial space to the less-expensive markets with the ability to add jobs.

The region’s economy ended 2016 with continued employment growth. It has increased substantially since the beginning of the current cycle. Nearly 11,000 North Bay nonfarm jobs were added in 2016. There were 5,200 more in Marin–Sonoma, up 2.8 percent and 0.9 percent, respectively. Total nonfarm regional employment was 580,530 and in Marin–Sonoma 395,250. Unemployment eased to 3.5 percent, down 1 percent from 2015.

SAUSALITO LEADS MARIN

Marin County industrial real estate vacancy at the end of last year was a scant 2.4 percent, up slightly from 2.6 percent in 2015. Nearly 73,000 square feet of deal activity occurred there.

The majority of Marin industrial activity was in Sausalito–Mill Valley. Net absorption was 22,000 square feet, and the asking rent crept up to $2.76. That’s the highest rent we’ve seen since tracking this market.

In Corte Madera, there has been no activity in over 12 months, because the submarket statistically has no vacancy. Central and north San Rafael had positive absorption of 23,000 square feet, and rents crept up to $1.37 per square foot monthly. Novato’s vacancy dropped to 4.6 percent, down from 6.0 percent in 2015. Rent remained flat at $1.19 per square foot.

Lack of available product and little to no new speculative construction will continue to reduce overall vacancy rates and result in continued rising rental rates in the North Bay.

Steven Leonard (steven.leonard@cushwake.com) is a managing director of Cushman & Wakefield in San Rafael.

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