By LAWRENCE E. HAZARD, SIOR

The 1998 edition of Comparative Statistics Industrial and Office Real Estate Markets, published by the Society of Industrial and Office Realtors, states that future generations will look back at the 1995 to 2000 period in the United States as the "Golden Age of the American Economy."

The commercial real estate market has benefited greatly from the upswing in the nation's economy. Industrial production in the U.S. is running at almost 85% capacity. Even with production oriented toward just-in-time delivery, the need for warehouse space and distribution facilities has grown rapidly. Furthermore, there has not been a massive shift of production and manufacturing jobs to Mexico as predicted by some opponents of NAFTA. Rather, the requirement for domestic assembly/manufacturing space has continued to grow.

The west coast, which represents more than 2.3 billion square feet of industrial space or more than 22% of the entire warehousing and manufacturing facilities in the U.S., has been a principal beneficiary of the nation's booming economy. Vacancy rates currently run from as low as 3% to slightly more than 10%, depending on the geographical area and the market segment evaluated.

Solano has a way to go

With all the above euphoric news about industrial real estate, Solano County has yet to fully benefit from the same conditions that make Silicon Valley the hottest real estate market in the nation. The high-tech push north from San Jose has yet to reach Solano County, though it has certainly affected Fremont and the Tri-Valley area, including Livermore. In those industrial real estate markets, existing developable land is almost impossible to find, and values are being bid up almost on a daily basis.

Within Solano County, vacancy rates currently range from 5%-11% when measured against various industrial product types. Because the industrial areas that make up the submarkets of Solano County are relatively small, the move of a single tenant can dramatically change the vacancy level. For example, Biagi Bros. recently built a 400,000sf distribution and wine storage facility in Napa for its use. As a result, it terminated its leases on approximately 230,000sf in buildings owned by Equitable Life Insurance Company in Benicia. This single change represented almost a 5% swing in Benicia's industrial vacancy rate, and Benicia's industrial park is the largest in the county.

Rising asking rates

The most significant change in the market over the last year has been the rapid rise of asking real estate rents.

From 1995 through 1997, rents were relatively stable or increased modestly. In contrast, 1998 rents are almost 10% higher than the average over the last three years. As a result of these trends, along with a shortage of vacant industrial space, companies are able to sublease surplus space very rapidly, particularly space with desirable features, such as heavy power or yard space.

Additionally, improvements paid for by owners on behalf of tenants are being amortized over the shortest term possible; rental concessions to tenants are almost nonexistent; and owners and developers are attempting to pass on to the tenant all expenses, sometimes even including management fees! Consequently, new rents are being pegged to the cost of new buildings rather than to currently available space.

Significant transactions in 1997

In Benicia, two transactions accounted for almost 250,000sf of newly leased space.

In the first deal, Yandell Truckaway, a private operator of distribution centers and since 1989 operator of a Benicia warehousing facility for Vitro Packaging of Dallas, a beverage glassware manufacturer, leased 120,000sf for its own operation at 363 Industrial Way. Yandell continues to operate almost 140,000sf for Vitro in the adjacent space at 363 Industrial Way. This building was the site of the former Ace Hardware regional distribution center.

In the second transaction, Benicia Industries, operator of the private Port of Benicia, leased 120,000sf for the storage and preparation of rice for shipment to Japan and the Far East. This is the beginning of what Benicia Industries hopes will be a large agricultural products business, with shipments passing through Port of Benicia. Currently, Port of Benicia principally ships only automobiles and petroleum products through its facilities.

At Mare Island in Vallejo, Womack International has leased approximately 115,000sf for manufacturing aluminum and environmental products. Addi- tionally, the City of Vallejo has contracted with Lincoln Property Company to develop about 200 acres south of Highway 37. Lennar Partners was selected to master plan approximately 650 acres, which represents the majority of the non- public acreage at Mare Island.

In Fairfield, Sacramento-based Panattoni Development Company developed a new 330,000sf distribu- tion center. This facility has been leased to Ball Foster Glass Company and Post Trucking Company. Ball Foster, which manufactures and distributes glass containers predomi nantly for use in the wine industry, now has almost one million square feet of space in Cordelia.

During 1997, there were several build-to-suit projects in southern Solano County, the most interesting of which was the Alamillo Steel building on East Channel Road in Benicia. This 38,000sf building houses a major steel fabricating operation. Alamillo, which is owned by Conco Cement of Concord, provides reinforcing steel and concrete for major freeway interchanges and commercial buildings. This steel fabricating plant is a state-of-the art building, with large overhead cranes and computer-aided operations.

The interesting facet of this new facility is that it looks more like a high technology building from the outside. It exemplifies the degree to which cities are going to require industrial buildings to conform to the vision the city has for its industrial area.

1998 projects

This is the first year in almost ten that significant projects are being built on speculation.

Panattoni has completed 240,000sf on Watt Court in Fairfield, with 57,000sf still available for lease. Panattoni has planned 500,000sf for Watney Way in Solano Business Park, also in Fairfield. It is noteworthy that Panattoni is hedging its bets by developing land in the Green Island area of Napa as well.

One of the top ten REIT's, Menlo Park-based Spieker Properties has 220,000sf in four buildings under construction on the Goodyear Road area in Benicia Industrial Park.

It is interesting to note that none of the projects planned for 1998 in Solano County will be handled by developers active in the last boom of the 1980's, since many of those companies no longer exist.

Market Forecast

With the additional construction under way in southern Solano County and the surrounding area, the very low vacancy rates are sure to climb by the end of 1998. The good news is that this will provide more opportunities for companies wishing to expand or move into the area. The bad news is that the lease rates for these buildings are pro- jected to be 10%-20% higher than existing rates for similar facilities.

Additionally, the buildings on the drawing boards are designed for standard uses. Any company with unusual requirements, such as yard space or lay-down area, heavy or high voltage power requirements, and any other specification that might be considered nonstandard, will have a difficult time finding a facility to fit its needs.

Financing is currently readily available for build-to-suits. Consequently, well-financed companies can build their own facilities if suitable ones can't be found. In most instances, it takes almost a year to complete this process. While entitled land is currently in relative abundance in Solano County, in the near future it is probable that entitled land will be less available, and prices are sure to rise.

Industrial lease rates are expected to rise a minimum of 10% during 1998. Lessors will require longer-term commitments (i.e., five years or longer) and tenants will be forced to carry a higher share of a building's operating expenses.

The best deals will be made by professional independent experts with in-depth market knowledge and experience who can represent the interests of the parties fairly.

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Lawrence E. Hazard, SIOR, a principal of CRS, Commercial Real Estate Services in Walnut Creek, specializes in industrial properties in Solano and Contra Costa counties; 925/933-0200.