By Meghan Hall
The need and desire for industrial space throughout the San Francisco Bay Area has grown, as office development in some of the region’s densest cities such as San Francisco has seen its industrial inventory shrink at the expense of office development. Many of the Bay Area’s leading industries, from technology to food, wine and e-commerce are still growing steadily; however, these industries and many others are targeting high-end, new construction industrial properties. As less desirable, older properties become vacant, they are struggling to attract new tenancy. The result in Napa and Solano Counties, according to a second quarter Industrial report released by Colliers International, is that the vacancy rate for industrial properties in the two counties has risen for the first time in five quarters in 2019.
According to the report, the combined vacancy rate for both counties increased from four percent to 6.1 percent during the second quarter. Net absorption came in at negative 1,059,683 square feet as several large blocks of space became available and leasing activity slowed from previous quarters. In the first quarter of 2019, net absorption totaled 702,541 square feet. Asking rates decreased to $0.59 per square foot per month triple net (NNN), but Colliers states that the prices are a reaction to vacancies in the market as opposed to a market slowdown.
Several large properties came online during the second quarter, causing the vacancy rate to increase. In American Canyon, where the vacancy rate previously sat at 0.0 percent, vacancy rose to 0.9 percent when one 71,799 square foot warehouse, production and office property came on the market at 89 South Kelly Road. Fairfield also experienced an uptick in vacancy, which increased from 4.6 to 5.6 percent due to light leasing activity. Benicia’s vacancy rate rose from 3.5 percent to 9.1 percent after 168,916 square feet of warehouse space at the Benicia Industrial Park became available. The vacancy rate in Dixon rose even more, from 0.0 percent to 19.4 percent when the 447,042 square foot warehouse formerly occupied by Gymboree at 2299 Kids Way hit the market.
At the same time, deal velocity in both counties slowed over the course of the second quarter. Just two leases greater than 40,000 square feet were signed, down from the five leases in the same size range from last quarter. The first lease, and the largest in both counties of the quarter, was Northbay Distribution’s lease of 2029 East monte Vista Ave. in Vacaville. Northbay signed its lease in May for 238,050 square feet of warehouse and distribution space at the facility. The second of those leases was for a 40,000 square foot warehouse and distribution space at 767 Eubanks Drive in Vacaville. Future Link signed the lease for the space in April of 2019.
The next three largest leases of the quarter were smaller; Pure Luxury Transportation renewed its lease for 12,150 square feet of space on Case Court in May, while ABM Building Solutions signed a lease for 13,036 square feet of space at Goodyear Road in Benicia. Fortis Solutions Group West had the third largest lease of the quarter after it took 14,810 square feet of R&D and flex space at 535 Airpark Road in Napa in April of this year.
However, there are still several large blocks of industrial space currently under construction in both markets. Construction continues at Ridgeline Property’s Group’s warehouse and distribution center on Courage Drive. The 378,405 square foot project is moving forward on a speculative basis, with completion expected this summer. Vacaville, which is the most active city in terms of construction, is currently expecting the completion of Buzz Oates new warehouse facility at 891 Eubanks Dr. The 264,000 square foot building will be ready for occupancy this month, the report states. Additionally, Buzz Oates completed a 39,028 square foot warehouse at 250 Crocker Drive. Also under construction is Dermody Properties’ 252,160 square foot warehouse at 2121 Icon Way, which will be delivered this fall.
While the last quarter did see an increase in vacancy, Colliers states that both counties are well positioned for continued commercial real estate expansion due to their position between San Francisco and Sacramento. And, the economic outlook for the San Francisco Bay Area remains more optimistic that the national economy, thanks to the region’s multiple — and rapidly growing — industries across multiple sectors.
Colliers International did not respond to The Registry’s request for comment.