Article by JAMES MANLEY, KEEGAN & COPPIN CO. INC./ONCOR INTERNATIONAL

The largest recorded Petaluma commercial property sale during the final quarter of 2017 was $14 million for close to 16 acres located at 360 Corona Road to Denova Homes, Inc.

But there was an unusual amount of sale activity on the west side of Petaluma, including some boutique offerings that have been on the market for some time. A refurbished mansion conversion at 1197 E. Washington St., near the Highway 101 interchange, was purchased by Point Reyes Bird Observatory for $1.1 million. The historically significant 3-story property located at 25 Western Ave. sold to Kadami Enterprises for $2.9 million shortly after it purchased 620 E. Washington St. for $1.185 million.

In total, there were about 11 actual sales on the west side in the fourth quarter but only four on the east side.

There has only been one east-side sale reported to date in 2018. There are several interested buyers but owners continue to struggle with respect to placing their proceeds. Most Petaluma owners are local and invest locally. As a result, they want to reinvest locally. This will likely loosen up once the new corporate tax laws come in to affect.

There were 29 Petaluma leases signed in the last quarter of 2017. Again, the west side came out strong. Foundry Wharf estimates about 30,000 square feet have turned over, and that development is now 100 percent full. Most of the leasing activity remains in the “incubator zone,” with virtually almost every lease outside of Foundry absorbing spaces of less than 4,000 square feet for both office and industrial.

While 2018 appears to be a little stronger, with approximately 21 leases signed in the first two months alone, the focus is still for spaces of under 4,000 square feet.

CANNABIS COMES TO TOWN 

There has been upward pressure on pricing, primarily for industrial space, and it is about to get tighter with Petaluma having adopted a plan for allowing the manufacture of cannabis and related products.

The cannabis industry has been active in any city where such businesses can legitimately operate, and they have often overbid opportunities. This has forced the traditional users out of position for many properties.

INDUSTRIAL MARKET TIGHTENS

Available industrial space in the city increased, at least on paper, and finished 2017 with 5.6 percent vacancy, compared with 5.3 percent after the third quarter. That’s not due to demand; rather, it’s what is offered.

There are currently 19 available industrial spaces within Petaluma. Most of these are larger second- or third-generation spaces, but they are generating interest. Asking rents are as low as 80 cents per square foot monthly on a standard-industrial-gross basis, coupled with 10 cents a square foot in chargebacks (such as common-area maintenance, or CAM) and roughly 22 cents per square foot for utilities. Those opportunities are very difficult to find.

The average asking rent is 95 cents standard industrial gross. Rates top out at $1.25 modified gross (my listing; nice space). But if you do the math, it is averaging $1.15 to $1.20.

There is definite upward pressure on industrial-space pricing, and we still struggle for supply.

10% OFFICE VACANCY?

Office space has been performing strong and vacancies dropped from 13.7 percent at the end of the third quarter to 11.7 percent at the end of the year. Based on what has occurred during the first couple of months of 2018, I wouldn’t be surprised if we finally reach 10 percent vacancy by the end of this year.

The top end of actual office lease rates is around $2.25 per square foot monthly on a full-service basis, and the lower end is around $1.50 on a standard-industrial-gross basis. Most office leases are focused on full-service rates, inclusive of utilities and maintenance services.

If we do hit that 10 percent mark, we will see prices creeping up over the course of the year. Office is still a bargain in Petaluma, compared with Marin County.

This is all positive news, but we remain subject to a fickle and ever-changing economy. If interest rates continue to edge up, it is going to affect the market. If some other shoe falls, we will feel it. The good news is that this is the North Bay, and we don’t need a fire to know that we’re strong.