Napa Industrial Report December 2008
“Construction activity, especially commercial and industrial buildings, is one of the primary indicators of economic expansion. It indicates economic investment in the community for which the investor is expecting a return. Because the building may not be completed and operational until the next year, building activity is often a leading indicator of near-term economic growth.”
—2008 Napa Economic and Demographic Profile
With our nation’s credit and stock markets unraveling, many are wondering if the end is near. Napa County, however, seems to have an ability to fend off economic weakness, and nothing shows our valley’s strength better than its industrial real estate market.
Supply is very limited and demand continues. At press time, third quarter numbers weren’t yet available. However, Napa County’s industrial vacancy in second quarter 2008 was a mere 4.4%—down 10% from first quarter 2008 and almost 40% from last year’s second quarter.
The wine industry is the primary driver of our local economy, especially when linked with the tourist industry. Premium wine and winegrape production is thus the primary economic base in the county. As wine production expands, there’s a continued need for industrial land to support it.
What little industrial space is available is found in the South County industrial area, between the cities of Napa and American Canyon. Only 2,000 total acres (vacant and developed)—0.4% of total land in Napa County—are designated for industrial. So, let’s see what’s being built.
American Canyon
In American Canyon, Stravinsky Development Group’s Hanna Court Warehouses are nearly complete. Located on 48 acres in the Green Island industrial area, the development features two warehouses totaling more than 700,000 square feet! The first warehouse, 411,106 square feet, is complete and the first occupants are moving in. The second warehouse, totaling 306,965 square feet, is under construction and anticipated to be complete next spring.
The city of American Canyon recently approved Hess Development’s Lombard Crossing. Located at the end of Lombard Drive, this 25-acre parcel will be subdivided into 20 light industrial lots. The city also recently approved the Biagi-Kendall Jackson warehouse. This 650,000-square-foot building, located on 37 acres just south of the Napa County airport, will consolidate 13 of Kendall Jackson’s wine warehouses into one. With rail spur accessibility, this facility will be able to ship wine across the nation.
South Napa
Panattoni’s Napa Airport Corporate Center in South Napa is planned to accommodate eight light industrial and high-cube distribution buildings, ranging in size from 20,000 square feet to 271,000 square feet. With rail accessibility, this development is ideal for manufacturing and distribution uses. Availability is currently targeted for first quarter 2009.
Within the Napa Gateway Business Park, McDevitt and McDevitt Construction Corporation has recently completed the 44,000-square-foot Cameron Wine Storage and Transfer Facility. Located on Technology Way, this facility will be used as a warehouse for bulk wine storage. Right next door, Napa Gateway Commerce Center will begin construction on two 20,640 industrial buildings in spring 2009. Located on a 3.1-acre parcel, these buildings will be divisible down to 2,844 square feet, with grade-level loading doors for each unit.
Just outside the Business Park, on the corner of Devlin and Airport Boulevard, is Greenwood Commerce Center. Located on the former Gunn property, this center features three new buildings totaling more than 375,000 square feet. Represented by Cushman & Wakefield, Greenwood Commerce Center is perfectly designed for distribution warehouse, manufacturing and light industrial uses.
Further north, on Devlin Road, Vineyard Commons has 19,440 square feet remaining in its 25,488 industrial building. Made in Napa Valley moved into the 50,000-square-foot building next door on May 28, 2008. Across the Highway, Napa Valley Crossroads recently completed two distribution warehouse buildings totaling 313,249 square feet. The first is already leased to Collotype Labels, a wine labeling company, and Biagi Brothers Wine Storage. The second building is available for occupancy at $0.58 per square foot (NNN).
With the limited amount of industrial space in Napa County, expanding up-valley wineries are starting to grow into the South County’s industrial areas. Harlan, Rombauer, and Darioush are just a few wineries that have recently acquired either land or space for various wine-related activities.
Summary
There are many who are predicting that a commercial real estate bubble, much like the residential bubble, is about to burst. Numerous reasons are cited, from the illiquidity of the credit markets to withering demand. But a strong local banking presence and global demand for Napa’s product (and services) are clearly bucking that trend.
Sonoma Industrial Report December 2008
The Sonoma County industrial market experienced a slight drop in its average asking rate, while its vacancy rate experienced a slight up-tick. At the close of the 2008 third quarter, Sonoma County’s average asking rate decreased $0.03 from the second quarter of ’08 to $0.71 per rentable square foot (NNN). Sonoma County also picked up an increase of 20 basis points in its vacancy, bringing it out of single-digit territory to a rate of 10.1% for the third quarter, even with where the market was one year ago.
Sonoma County finished the third quarter of 2008 with slightly more than 1.75 million square feet of available industrial space on the market, comprised of approximately 1.55 million square feet of direct space and 196,000 square feet, or 11.2%, of sublease space. Gross absorption for the county was a little more than half compared to the beginning of 2008, finishing third quarter 2008 with 197,781 square feet. For the second quarter in a row, net absorption recorded in negative territory, with -35,849 square feet representing “net” amount of space added back to the market during the quarter. However, this did represent some improvement from the second quarter of the year, which reported a -137,577 square feet.
Petaluma
Petaluma’s leasing experienced a bit of activity during the third quarter, as its vacancy ticked down 20 basis points to end the third quarter at 11.3%. Petaluma’s average asking rate also remained virtually flat at $0.83 per rentable square foot (NNN), a $0.01 decrease compared to the previous quarter. It’s interesting to note that, since we began tracking this submarket in first quarter 2004, its average asking rates have remained between $0.70 and $0.85 per rentable square foot (NNN).
Petaluma had a total of 550,576 square feet of industrial space on the market at the close of the third quarter 2008. Key to this statistic is that, out of the total availability in this submarket, more than 55% (roughly 314,000 square feet) is located in just three buildings. Removing these vacancies from the market brings Petaluma’s overall vacancy rate to just 4.9%.
Rohnert Park/Cotati
The combined Rohnert Park/Cotati submarket finished the third quarter with a single-digit vacancy rate of 8.8%, representing an increase of 150 basis points from the end of the second quarter. However, the average asking rate in this submarket decreased $0.05, to $0.69 per rentable square foot (NNN). Activity in this market was fairly quiet, as gross absorption for the quarter only reported 4,826 square feet. Notably, the third quarter marked the first negative net absorption figure in this submarket in six consecutive quarters.
Santa Rosa
The Santa Rosa industrial market experienced its fifth consecutive quarterly increase in vacancy, finishing the third quarter 2008 at a double-digit rate of 10.3%, compared to 10.1% in the previous quarter. Santa Rosa also experienced a downward tug of $0.04 in its average asking rate in the same period, to $0.65 per rentable square foot (NNN) at the end of the third quarter 2008. Since NAI BT began tracking this market in first quarter 2004, Santa Rosa’s industrial vacancy has hovered in the range of 8 to 10%, while its average asking rate has remained between $0.65 and $0.75 (NNN), reflecting a well-balanced and stable market.
The Santa Rosa Airport submarket experienced a 40 basis-point decrease in vacancy, dropping from second quarter’s 8.6% to 8.2% by the close of the third quarter 2008. The decrease was due to positive net absorption. Average asking rates remained flat, at $0.67 per rentable square foot (NNN). This submarket remains the healthiest due to the past expansion of the wine storage industry absorbing warehouse space in the area.
Marin Industrial Report December 2008
For the third quarter of 2008, Marin County’s overall average asking rate for office space decreased $0.05 from the close of the second quarter, to $2.75 per rentable square foot (full service). This decrease in asking rate was coupled with a 220 basis-point increase in vacancy countywide, from 13.2% to 15.4% in the same timespan. Marin County closed third quarter 2008 with slightly more than 1.46 million square feet of total available office space, comprised of 1,100,499 square feet of direct space and 359,702 square feet, (24.6%) of sublease space. Gross absorption for third quarter 2008 hit a low compared to the past five quarters, dropping to 119,036 square feet; net absorption closed at -210,928 square feet. This quarter’s net absorption is the lowest since NAI BT began tracking this market seven years ago.
Southern Marin
In Southern Marin (Sausalito, Tiburon, Mill Valley), the overall average asking rate for third quarter 2008 increased $0.12 to $3.72 (full service) from the previous quarter. This was due to the addition of space at Belvedere Place in Mill Valley. At $5 per square foot (full service), it’s the highest asking rate in the county. Vacancy increased 20 basis points to finish the quarter at 9.0%.
Within the submarket, Sausalito/Tiburon finished the quarter with a 5.8% vacancy rate, down 110 basis points from the last quarter and with an average asking rate of $3.60 per rentable square foot (full service), up a $0.02 from second quarter 2008. Meanwhile, Mill Valley ended with a 14.2% vacancy rate, up 220 basis points from the past quarter and an average asking rate of $3.80 (full service), an $0.18 increase compared to the past quarter. Sublease space is still relatively abundant in this submarket, as it accounts for 42.4%, or 25,219 square feet, of its total availability; this is in large part still due to the credit crunch.
Central Marin
Central Marin (Corte Madera, Larkspur, Greenbrae) vacancy reported an increase of 100 basis points from the previous quarter, closing the third quarter 2008 at 11.0%. The average asking rate decreased $0.11, closing at $3.63 per rentable square foot (full service). Asking rates at EOP’s Greenbrae Drake’s Landing remained the highest in the market, with water view space at $4.85 per rentable square foot (full service). The Larkspur/Greenbrae average asking rate decreased by $0.09, from the previous quarter, to $3.82 (full service). Over the same period, its vacancy rate jumped 70 basis points to 12.9%. It’s interesting to note that just one year ago in the same quarter, the vacancy rate for this submarket was only 4.7%. Due to the continuation of the credit crunch, we’re still seeing real estate and financial companies downsizing or closing offices. Corte Madera’s vacancy increased to 7.6% during the third quarter of 2008, compared to 6.0% in the second quarter 2008, while it’s overall asking rate decreased $0.05, to $3.05 per rentable square foot (full service).
Northern Marin
In Northern Marin (San Rafael, Novato), the vacancy rate increased 280 basis points, from 14.4% in the second quarter to 17.2% at the end of third quarter 2008. Asking rates in the submarket decreased by $0.05 from last quarter, to $2.57 (full service) in third quarter 2008. San Rafael posted a 17.7% vacancy rate, a jump of 360 basis points from last quarter, coupled by an average asking rate of $2.77, a $0.01 decrease during the same time period. Novato’s vacancy rate jumped up 180 basis points, to 16.5% at the close of third quarter 2008, while its average asking rate decreased $0.09 to $2.30 (full service).
Summary
We anticipate sublease space will continue to hit the market through the end of the year, while companies continue to adjust staffing levels to meet current market conditions or close offices. It’s interesting to note that 24% of current space available on the market is sublease space, a reduction from its 28.5% two quarters ago.
Investment Activity
The investment activity in the third quarter was substantially down when compared to the same reporting period in previous years. The largest office building sold in the quarter, in terms of square footage, was 26,760 square feet at 348 Bell Marin Keys in Novato. Another notable sale was 505 San Marin Drive, Suite A, in Novato, a 19,387-square-foot building. Sales activity has stalled due to shifts in lending practices and the overall effect of the market on buyers’ confidence. While we expect to see a change in pricing, Marin County has held up fairly well in terms of pricing and vacancy, as it’s less exposed than other parts of the Bay Area.
