Petaluma Market Update Q3 ’24

In spite of the Election Year pull-back, Petaluma has experienced twenty-eight sale closings across all commercial property classes this year.

The former Palace of Fruit, technically not in Petaluma, closed at the end of June for $372,580. Considering the condition of the property, this was a fair price and will provide a high identity opportunity for the buyer.  On the other end of the scale was the August 12^th sale of 1345 Industrial Avenue (former Fishman Supply HQ) to OMW Corporation, a Novato-based precision machining company. It is unknown as of this writing if this is an expansion or a relocation. The sale price was discounted 8% from the $5,500,000 asking price and closed at $5,056,000 ($194.46/psf).

Prices have softened, which is to be expected in the current environment.  A user is always going to be willing to pay more than an investor, but there is a limit to how far one can push the numbers, and we’ve experienced that threshold. We’re not back to the historic 8 to 9 cap deals many of us cut our teeth on, but when interest rates rise, the rate of return has to adjust accordingly, or an investment doesn’t make sense.  Commercial isn’t subject to the emotional factors that drive many residential deals higher. It is a more cerebral decision that pays close attention to the bottom line. That’s not to say that emotions don’t weigh into it. But those emotions are tempered by the logistics and, quite often, the input by critical members of an enterprise’s team.

Leasing has increased substantially compared to last year.  Since the beginning of the year there have been forty-five non-retail lease deals in Petaluma.  Surprisingly, office has been the clear leader in closed lease transactions. Perhaps landlords are taking a cue from the increased office vacancies happening south of Petaluma, because the vast majority of these new office deals have inked closer to $2.10/psf ($25.20/psf/year) than we have seen in a while.  Out of 35 office deals, only two were renewals. The 10 industrial deals signed were primarily in the incubator range (less than 4000 sf).  Only 3 three were above that number, the largest being 2210 Pine View Way, which was approximately 15,000 sf.

These results are indications of an emerging trend in Petaluma.  It has long been an industrial landlord’s market and that appears to be changing. Part of this is due to pricing pushing more office users further north. As manufacturing continues its current slump some buildings are sitting much longer than anticipated. There is a trend to repurpose buildings as a path toward getting the lights on but that is a balancing act.  Unfortunately, I think industrial owners are going to have to revisit their pricing in order to make it financially compelling to get tenants across the county line.

The Fed’s rate cut in September is now only tempered by the November elections. Once those results are qualified, whether it is your chosen candidate or not, business will pick up. The September Fed 50-basis point cut is already stimulating market activity, but as a species we don’t like uncertainty.  Once the election is behind us, particularly if there is another rate cut in mid-December, there is going to be a release of pent-up demand and we should see continued growth into 2025.