SANTA ROSA, SONOMA – Two new industrial condominium projects, with a total of 73,000 square feet of space in 70 units, are set to break ground this year. And another 74,000 square feet of condos are proposed.

New industrial space in increments of 1,000 square feet has not been available for sale in years and is in short supply for lease, according to local commercial real estate brokers. However, some commercial real estate experts continue to wonder about the depth of the commercial condo market as other commercial condo projects reach the market.

Skypark Properties LLC purchased property at 5491 Skylane Blvd., located at the southwest corner of Aviation and Skylane boulevards near Charles M. Schulz–Sonoma County Airport north of Santa Rosa.

Before the property sale, the previous owners, Joe Moore and Sid Lewin, received approvals for three buildings totaling 31,000 square feet, according to Colliers International Partnership's Sandy Swallow, who represented them in the March 1 deal. Ralph Cole of Orion Partners represented Skypark.

Skypark plans to seek a condominium map for 29 light-industrial or flex-space units, start construction mid-summer and have the shell complete in nine to 10 months, or by spring 2008, according to managing member Douglas Stricker of DLR Ventures in San Jose.

"There seems to be a niche for these projects," he said.

Some disagree.

Keegan & Coppin partner Mike Flitner has been involved with leasing at the new 64,000-square-foot Shiloh Business Center industrial incubator development in Windsor and has seen the units fill up rapidly. In Santa Rosa, Stempkin Business Park is more than 85 percent leased, and Empire Industrial Court is full.

"The question is how deep of a market it is because many of those first-time commercial space occupiers are coming out of garages or other commercial space," he said. "However, there are not many opportunities to buy."

Rizzo & Associates is developing 175,000 square feet of industrial space at Industry West Commerce Center on Todd Road south of Santa Rosa and has it available for lease or sale. In Petaluma, Delco Builders President Doyle Heaton recently completed 40,000 square feet of condos at Technology Way Commerce Center.

However, the successful sale of the units in Willie McDevitt and Ed Brush's Petaluma flex condo project MMM Condominiums and the sell-out of Keenan/Lovewell Ventures' The Vineyard condo redevelopment in north San Rafael were more about market timing than market depth, according to Steven Leonard of Meridian Commercial.

"When a project comes to market, it attracts the low-hanging buyers," he said, pointing to several units selling at 350 Ygnacio Blvd. in Novato last year but the rest of the units remaining on the market.

The Santa Rosa project isn't DLR's first industrial condo project. The firm is set to break ground soon on a project twice the size in the East Bay city of Concord.

The Santa Rosa units would range in size from 750 to 1,200 square feet and in price from $350 to $400 a square foot. The units are targeted to be eligible for U.S. Small Business Administration financing, with financing available through Skypark, Mr. Stricker said.

The SBA offers financing that can cover up to 90 percent of the acquisition cost for the owner of a business to occupy a space. Such financing and low interest rates have been big selling points for the several commercial condo projects completed in the North Bay in the past few years.

The last major wave of commercial condo construction was in the 1980s, with developments in Santa Rosa and Petaluma.

In the city of Sonoma, Carneros Business Park developer Bill Saks and Mr. McDevitt and Mr. Brush of Petaluma-based commercial general contractor McDevitt & McDevitt plan to break ground July 1 on a 41-unit, 42,000-square-foot condo facility in Carneros Business Park.

Called Carneros Business Condominiums, the $7.5 million T-shaped project is set for completion by the end of this year. The 1,000-square-foot units would range in price from $205 to $240 a square foot, delivered in "warm shell" condition. Up to 70 percent of the building can be office space.

It would be the first building built in the 53-acre business park owned by the family of vintner Gary Heck and located on Eighth Street East south of the city.

The park is approved for up to 770,000 square feet of mostly wine warehouse space. One prospective buyer, a local company that manufacturers specialty automobile parts, is considering the purchase of several condos or a site for a 20,000-square-foot building for a major expansion. Another prospect is looking to buy another building site in the park.

In Petaluma, Waldman Management of San Francisco acquired a 73,900-square-foot office-warehouse building at 1129 Industrial Drive just north of Petaluma Auto Mall and has applied for a condo map for 13 units, according to Mr. Leonard, one of the Meridian Commercial brokers marketing the property. The building housed Willitts Designs, which Lennox purchased last year and moved to Minnesota.

Waldman wants to create nine office condos with 946 to 2,400 square feet, priced from $185 to $230 a square foot, according to Mr. Leonard. The building would also have four warehouse condos with 7,000 to 17,800 square feet and asking prices of $125 to $150 a square foot.

Part of the transformation to condos will be a new lobby for the building and an elevator to reach second-floor office space.

North Bay Investment Market

INVESTORS EXPECTED TO STAY ACTIVE IN 2007

NORTH BAY – Investor demand for North Bay properties remains strong. Recent interest rate increases have pushed investor cap-rate expectations, but rising construction and energy costs and a lack of developable land have increased property replacement costs.

With owner/users adding to the pool of prospective buyers, demand for North Bay investment properties should remain strong for the foreseeable future.

After heavy institutional activity in 2005, the North Bay commercial investment market returned to more normal levels of activity in 2006. Institutional activity tapered off significantly, and most 2006 investment transactions involved individual investors as both buyers and sellers. Approximately 75 percent of commercial property sales have been to owner/users.

The majority of North Bay investment sales ranged in price from $2 million to $10 million. Cap rates for investment sales have ranged from 5 percent to 6.5 percent for smaller properties and 6 percent and 7.5 percent for larger buildings.

Due to rising interest rates, cap rates for these transactions have begun to show signs of upward pressure, especially for industrial and office properties.

With asking lease rates in Marin County climbing and vacancy rates declining, office properties have remained desirable to investors. Office properties have sold for $200 to $400 per square foot in the last year. The most expensive of these properties, per square foot, were smaller buildings with owner/user potential.

Equity Office Properties recently added 1 and 3 Harbor Drive, a 115,000-square-foot class A property, to its North Bay portfolio. Equity paid $32.5 million, or $282 per square foot, with a cap rate of approximately 7.2 percent.

Also of note, 100 Tamal Plaza, a 100 percent leased 21,300-square-foot class B property, sold for $6.8 million at a 7 percent cap rate.

Equity Office made major inroads in the Sonoma County market in 2005, acquiring over 1 million square feet of office inventory. However, the market shifted back to traditional activity in 2006, with local investors involved in most transactions. Prices for office properties ranged from $160 to $220 per square foot, with cap rates between 5.5 percent and 7 percent.

One sale of note occurred at 487 Aviation Blvd. in Santa Rosa. This 27,000-square-foot class A office property sold for $5.4 million, or $200 per square foot, at a cap rate of 6.77 percent.

As expected, the overall amount of inventory sold was down year over year in 2006. This is a function of the large purchases by Equity Office Properties and does not indicate softness in buyer demand.

With the new light-industrial units of The Vineyard all sold and limited inventory throughout Marin County, industrial sales volume went down from the previous year. Still, this limited inventory has made industrial properties highly sought after. Industrial property buyers have paid between $100 to $250 per square foot, with smaller, single-tenant properties such as those at The Vineyard having the highest cost per square foot.

Sonoma County industrial properties have received increasing demand from buyers in the past year. Many potential investment-grade industrial buildings have drawn interest from larger users for use as owner/user properties.

One result has been a trend toward seller lease-back sales where the buyer acquires the property then leases part or all of the building back to the seller. Cap rates for industrial buildings have ranged from 5 percent to 7.5 percent, with prices from $85 to $140 per square foot. An example of a lease-back sale occurred at 3300 Coffey Lane in Santa Rosa where Advanced Lighting Technologies sold the 143,000-square-foot property for $14.7 million, or $102 per square foot, then became a tenant in the building. The cap rate for this sale was 7.48 percent.

In recent years, the retail investment market had been marked by institutional purchases of large centers such as Strawberry Village in Mill Valley and Larkspur Landing. Recent deals, however, have involved smaller, multi-tenant properties with individual investors as buyers and sellers. Retail buyers have paid $200 to $400 per square foot during this period and reported cap rates ranging from 5 percent to 6.5 percent. Demand for these properties has stayed strong as many investors, oftentimes involved in a 1031 trade, are looking for the stable income provided by retail properties.

Retail properties continue to be in high demand from investors looking for stable income. Tenants abound, and retail vacancy rates remain low, even with several new retail projects under construction throughout the county.

Asking lease rates have also been experiencing upward pressure, topping $3 per square foot on a triple-net basis in some well-located areas.

A sale indicative of the market occurred at 2770-2780 Stony Point Road. This 21,200-square-foot strip center, anchored by Starbucks, sold for $6.417 million, or $302 per square foot. The cap rate for this sale was 6.08 percent.

•••

Bill McCubbin is president and CEO of Orion Partners. He can be reached at 415-472-8703.

Santa Rosa Industrial Market

VACANCY TO DROP AS PRODUCTION SLOWS

SANTA ROSA – The Santa Rosa industrial market at year end 2006 remained strong with little change from the year end of 2005.

The pure warehouse/industrial segment of the market showed continued strength and a slight vacancy rate increase to finish the year at approximately 7.5 percent, up from a 5.7 percent vacancy in 2005.

In spite of the closure of several manufacturing companies, such as Sonoma Metal Products, as well as companies opting for out-of-state locations, such as Amy’s Kitchen, the Sonoma County industrial market has remained surprisingly stable.

The wine industry began yet another year of steady growth, evidenced by the consumption of more warehouses, such as a lease by Sonoma Wine Co. for expansion into 117,000 square feet on Coffey Lane. In addition, Alexander Valley Cellars made a big move into just more than 110,000 square feet off Aviation Boulevard.

Mesa Beverage Inc. purchased 19 acres of land and should be able to occupy their brand new 140,000-square-foot building, currently under construction, by the end of this year.

Due to the limited supply and the increasing price of land, industrial warehouse space is most likely going to be restricted to the existing inventory, with very little if any being planned in the future.

The uptick in the business climate has started to put upward pressure on industrial rents. Asking rents have remained unchanged from the previous year, ranging from 60 cents to 70 cents per square foot on a triple-net basis for warehouse space. However, more buildings are moving toward the higher end of the scale. Industrial office still remains in the 95 cents to $1.20 range per square foot on a triple-net basis.

In 2006, we saw a continuation of ownership-driven transactions by small and medium-sized companies. These are owner-led companies with headquarters in Sonoma County who purchase property rather than lease.

Low interest rates and relatively short supply of product have kept the per-square-foot pricing at high levels. The bright side is that despite the rising costs of doing business here, these companies and their related jobs will remain here to enjoy the high quality of life in the North Bay.

Today in Santa Rosa, it is still a seller's market. Last year, approximately 23 industrial/flex buildings were sold with an average sale price of about $144.14 per square foot.

In the past year, the high land prices, the California tiger salamander and rising construction costs kept developers from launching many new warehouse projects in Santa Rosa. The current business climate is continuing to grow, and we have seen a few more flex-type buildings constructed. Therefore, with the expansion of business and slow production of new buildings, we should see a future reduction in the industrial vacancy rates next year.

•••

Preston Smith is an agent and principal of Orion Partners. He can be reached at 707-543-8316.