San Mateo County’s market fundamentals continue to strengthen as the employment base expands at a healthy pace. Tech employment has been especially strong, driven by the expanding biotech companies in the region. Of the more than 7,600 total nonfarm jobs added in the past twelve months, 46.2% were high tech jobs and 5.4% were manufacturing jobs, according to Moody’s Analytics. The manufacturing employment base has been improving with 1.8% employment growth over the past year; however, the total number of jobs lost during the recession has not yet been recovered.
OVERALL VACANCY NEARS RECORD LOW
The overall vacancy rate for industrial space plummeted 100 basis points during the second quarter and 180 basis points year-over-year to 3.7%. As market conditions continued to tighten, upward pressure was applied to asking rates, resulting in a 13.2% increase from the previous quarter and 52.2% higher than one year ago to end at $1.72 per square foot per month (psf/mo). Year-to-date leasing activity was slightly less than this time last year, however, it is likely the result of limited options hampering leasing figures, which we expect will continue in the short term. Net absorption, often a key barometer used to gauge the health of the market, reflects strong occupancy gains of 282,775 square feet (sf) recorded in the first half of the year. Tenants are finding the benefits in renewing existing leases as relocation within the market becomes increasingly challenging given the lack of available options coupled with strong rent appreciation.
The thriving biotech and medical device industries continues to fuel this market. As companies successfully move through the FDA approval process and receive venture backed funding, high tech expansion requirements will likely increase in the second half of the year.
There are only two projects currently under construction, both were preleased by strong credit tenants and scheduled to be complete in the fourth quarter of 2014. At the end of 2013, Theranos, Inc. preleased the 111,135-sf two-building high tech campus currently under construction in the Stanford Research Park. Onyx Pharmaceuticals preleased the 135,000-sf high tech building under construction and a 135,000-sf proposed building which will add a fifth building to the Alexandria Technology Campus upon completion.
Local high tech employment growth is poised to surpass state and national projections through the next two years, increasing by 2.7% through the rest of the year and maintaining a strong growth rate of 2.5% in 2015 according to Moody’s Analytics. Extremely tight market conditions coupled with a limited amount of supply in the pipeline will cause further upward pressure on asking rents as vacancy rates are expected to continue to trend downward.