Few industrial real estate options in North Bay Hwy. 101 corridor

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The industrial market in the North Bay has been very strong for the last three years. With limited inventory and relatively limited building, 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.

This is a similar trend that we are seeing in markets all around the Bay Area: limited inventory, rising rents and new construction 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 product.

The North Bay industrial market closed 2015 on a strong note. The vacancy rate for Sonoma and Marin counties was 6.2 percent, down from 7.5 percent one year before. Net absorption for the fourth quarter was a healthy 73,000 square feet. The total for the year was more than 333,000 square feet. Meanwhile, the monthly average asking rent continues to climb and now stands at 89 cents per square foot on a triple-net basis, up from 84 cents in the first quarter of last year.

PETALUMA LEADS SONOMA COUNTY ACTIVITY

Because of these strong market forces, tenants have been struggling to find quality space, which has resulted in projects. Petaluma is getting its first speculative industrial development project in decades, with 268,000 square feet of space at the Cader Corporate Center project in southern Petaluma. It is expected to be ready for tenant improvements in the third quarter of this year. There are two other large industrial projects in the planning process that could add another 200,000 to 300,000 square feet of quality product to the market in 2017.

Petaluma has been the center of activity in Sonoma County and ended the quarter with 3.7 percent vacancy. That’s an incredible drop from 8.1 percent 12 months prior. The average asking rent in Petaluma posted a modest gain in the fourth quarter, closing at 88 cents, up from 82 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, 140,000 square feet of space is currently under construction and another 370,000 square feet is planned. Food, wine and craft brewing companies remain particularly active throughout the county, along with other local service space users. Most of the planned or under constructions new product is preleased or in negotiations to be leased prior to completion.

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.

Sonoma County closed the fourth quarter with more than 83,000 square feet of net absorption. Vacancy continued to fall and was 7.7 percent overall, the lowest vacancy level we have tracked to date. All three of Sonoma’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. The recent pickup in activity gave Rohnert Park another strong quarter, posting over 27,000 square feet of net absorption at year-end. The asking rent climbed to $1.05 from 97 cents in the third quarter.

Santa Rosa also posted strong numbers in the fourth quarter, with 55,000 square feet of net absorption. The average asking rent nudged up to 74 cents, and vacancy improved to 9.7 percent.

Major drivers of North Bay industrial real estate activity have been low-cost housing and job growth, which are feeding the internal growth. Tightening markets in San Francisco will continue to push the workforce as well as users of industrial space to less-expensive markets with the ability to add job and places to work.

The North Bay economy ended 2015 with continued employment growth. Employment in the region has increased substantially since the beginning of the current cycle. The North Bay has added more than 54,000 jobs since the first quarter of 2010. Total regional employment now stands in excess of 654,000, while unemployment is down to just 4.5 percent.

SAUSALITO LEADS MARIN INDUSTRIAL ACTIVITY

Marin County industrial real estate vacancy at the end of last year as a scant 2.6 percent, up slightly from 2.5 percent recorded in the third quarter. Nearly 90,000 square feet of deal activity occurred there in the fourth quarter, but net absorption was just 24,000 square feet. Asking rents dropped to $1.30. Overall, Q4 was rather flat for Marin County.

The majority of Marin industrial activity was in the Sausalito–Mill Valley submarket. Net absorption was 10,000 square feet, and the asking rent crept up to $2.72. 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 San Rafael vacancy remained the same in the fourth quarter, while vacancy in north San Rafael dropped.

Novato maintained the highest vacancy in Marin County at 6.0 percent, up from 5.0 percent in the third quarter. While vacancy numbers have bounced around, the amount of actual quality space remains low and demand is still high.

We could finally see industrial development in Marin County for the first time in a long time, if conditions remain the same.

Trevor Buck is senior managing director, Brian Foster managing director and Steven Leonard senior vice president of Cushman & Wakefield.

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