Petaluma Forecast for 2016

Petaluma experienced positive industrial absorption throughout 2015. The market vacancies over 4 quarters were:

• Q4, 2014 Industrial: 6.6%
• Q4, 2015 Industrial: 4.1%

Result: The tight Industrial Market got much tighter. There were some large deals, such as the sale of 1450 Technology Lane (roughly 80,000 sf of Industrial with a total building size of 125,000 +/- sf) and 80,000 +/- additional sf at 3800 Lakeville leased to Morris Distributing. Those two deals took a healthy bite out of the standing vacancy, but the absorption was primarily driven by deals in the sub-10,000 SF range. Because of lack of Southerly inventory, the asking rate for Industrial space has increased by about 10% to the $.90 – $1.00/psf range on a Standard Industrial Gross basis.

Forecast: We will continue to see upward pressure on Industrial rates throughout 2016. While there will be some moves generated within town for existing tenants addressing their needs, we also expect migration from both directions on 101. Those moving north will be primarily cost driven, while those moving south hope to increase market draw and more favorable distribution routes. There are two projects in the market which should alleviate some of the pressure; however neither has broken ground yet.

Petaluma’s Office did not fare well. The most previous four quarters were virtually flat:

• Q4, 2014 Office: 15.8%
• Q4, 2015 Office: 15.9%

Result: Petaluma, despite its quality of life draw, continues to be a tough sell for office space. Most office deals are still in the incubator-sized range and businesses that ‘right-size’ basically create a wash. Some grow, some shrink, others watch the pot simmer and wait to see how the economy performs. Office tenants are always more cautious than Industrial tenants. This is partially due to a higher level of oversight, but is also due to fear of previous market corrections being projected against current national and global developments. It doesn’t matter if Google moves in to the market. It doesn’t matter if a biomed obtains FDA approval. While these developments impact the local economy, the office market is driven by tenants and buyers with an eye on global enterprise. It doesn’t make any sense, but it is a consumer confidence-driven package.

Forecast: Despite the gloomy numbers above, we should start to see some positive market absorption. I don’t believe we will see any upward pressure on rent, but I do believe we will see a reduction in vacancy due to dwindling supply and steep rent increases in Marin County office rents. There comes a point where decision makers start looking at their bottom line despite that which is happening hundreds (or thousands) of miles away.

Economic Indicators – 2016

The financial indicators for the nine Bay Area County Economies will continue their buoyant stride.

We all know that nothing lasts forever, but we are fortunate enough to be experiencing the effects of both local and global economic forces propelling our continuing expansion.

We have a confluence of economic drivers that are creating and continuing a sort of “perfect storm” financial environment. Just starting with the platform created by the success of a few of the Silicon Valley heavy hitters; Apple, Facebook, Google, and Twitter alone create a phenomenal foundation. Such an environment is and has become a magnet for international wealth, international talent and creating thousands of robust jobs and new tiers for business innovation.

In addition, we have a relatively new phenomenon in the explosion of the craft beer industry, and that is adding momentum to the already established Bay Area wine and food culture that continues its worldwide popularity. Tourism is at an all time high, and understandable considering the Bay Area’s location to the wine country, spectacular coast and intrinsic beauty.

As the Bay Area’s economy responds to these energetic market forces, you are witnessing the entire nine county expansion as it responds to these beneficial influences.

Both Sonoma & Marin County are seeing unprecedented appreciation in rents in both the commercial and residential sectors. Contra Costa County and Solano County are expanding their already vibrant transportation corridors and distribution hubs and pushing development to the east as far as Livermore. The BART expansion service to Antioch is opening in 2017.

The pressure for new housing in all counties continues and as such is creating multi-level job expansion on many fronts to accommodate that growth and demand.

Watch for the wine and beer industries to benefit from the Smart Train track system for transporting goods to Bay Area ports for international distribution.

Expect interest rates to stay low with some market up-tick because an election year status quo will want the appearance of a stable economic environment. The Federal Reserve will go to great lengths to avoid waves that could impact the current smooth sailing of today’s economic climate.

Contributed by:
Annette Cooper, Senior Real Estate Advisor
Rhonda Deringer, Senior Real Estate Advisor
Catherine Chapnick, Broker Associate

Economic Overview

Santa Rosa is the largest city between Portland and San Francisco with an estimated population of 175,000. It serves as the county seat for Sonoma County which is known worldwide as a leading wine region and has become a major player in the up and coming craft beer industry. Along with the agriculture the region is famous for; Santa Rosa is also home to other industries including high-tech, biomedical, manufacturing, education, tourism, and various other professional and personal services. The labor market has bounced back with companies hiring new employees. This is evidenced by an unemployment rate of just 4.7% down from the double digit rates we were experiencing at the height of the recession. There is a quality of life in Sonoma County that drives residents and companies alike to the region. This creates an environment for prospering business with Santa Rosa serving as the economic hub.

The major business parks and shopping centers put together the bulk of the base occupancy in the region.  In South Santa Rosa there is the Industry West Industrial Center and the Oak Manor Industrial Area which have many large manufacturing warehouses, as well as the Northpoint Corporate Center with a mix of Office and Industrial.  In Central Santa Rosa there is a vibrant downtown area with a mix of office and retail as well as the nearby Santa Rosa Business Park and the Stony Point Office Park which both have large multi tenant office buildings.  Further north is the airport area with parks such as the Airport Business Center and Westwind Business Park which have a mix of office and industrial uses.  Santa Rosa is also home to three shopping malls which together house over 200 merchants.

The economic recovery has accelerated over the past few years; particularly the industrial and retail market and high occupancy rates have allured investors to these product types. Santa Rosa has over 16,000,000 square feet of industrial buildings with a current vacancy rate of approximately 8% and almost 8,000,000 square feet of retail buildings with a vacancy rate of approximately 3.4%. These low vacancies have attracted investors and we are seeing more competition for available investments and lower cap rates which make it a great time for owner’s to consider selling.  The office market has been slower to recover with a vacancy rate of 16% in over 9,500,000 square feet of office buildings.  This also provides great opportunity for owner-users to be able to buy a vacant building for their business and take advantage of the still low mortgage interest rates.