Industrial Users Willing to Pay Premium Rents for Last Mile Ecommerce Sites

JLL San Francisco Bay Area Mid-Peninsula San Jose Fremont Hayward Alameda Richmond San Rafael Fairfield Livermore American Canyon Central Valley

By Jacob Bourne

Before analyzing the data, researchers at JLL were uncertain about the trajectory of demand for e-commerce logistics space in the Bay Area due to skyrocketing rents and inadequate supply. Yet when they were investigating trends for the firm’s E-commerce Year End 2016 report, they found a continued willingness on the part of industry players to pay high prices to be in close proximity to the region’s key demographics. The combination of the presence of a growing affluent population as well as Gen Xers and Millennials has created a strong appetite for online shopping as well as high expectations for fast delivery.

“Despite steep rental rate increases we saw an uptick in the number of deals between 2015 and 2016,” explained Katie Olson-Kenny, research manager of East Bay-Sacramento offices, JLL. “Based on our findings, it’s a priority for companies to be in close proximity to consumers despite the steep costs. If you look at where these tenants are locating in terms of demographics, you’ll see the customers who want same-day delivery.”

This cultural trend of demand for fast and flexible delivery options has spurred companies to modify real estate strategies in recent years. JLL’s report shows that since 2011, 53-percent of last-mile deals in the region have occurred between 2015 and the present. Over the past two years, lease rates for logistics spaces have risen between 29.8 percent and 73.7 percent. The Mid-Peninsula has consistently achieved the highest asking lease rates followed by Silicon Valley. Overall vacancy for this product type is at 2.4 percent with absorption being led by companies with a strong relationship to e-commerce, many with a purely online retail presence.

Olson-Kenny and her team are currently tracking 10.2 million square feet of active tenant demand in the Bay Area. According to Jason Ovadia, managing director of Northern California Industrial at JLL, many of the new companies seeking space are considering the timing of construction and delivery of logistics space as a top priority. These companies are eager to get a foothold in the market and are willing to either pay high rents to seize limited opportunities or look for space in secondary or tertiary areas.

“They want to get into the market as soon as possible and it’s really creating a dynamic where demand is severely outweighing supply,” Ovadia said. “The challenge is dealing with land constraints and the time it takes to go through CEQA. They’re starting to target projects based on timing of delivery versus the exact location. So the best location may be in Hayward for example, but if the timing isn’t right then they might go into outlying areas 30 to 50 miles away from San Francisco and San Jose, which are the major population centers.”

Ovadia spoke of a changing landscape with an influx of new developers aiming to use industrial real estate as an investment vehicle and the construction of new multi-level logistics facilities with more flexible designs. It’s also becoming more commonplace to find the use of automation technologies and robotics in these spaces reflecting a visible shift from more traditional warehouses.

Researchers found that the average lease was within a five mile radius of 94,000 households, reflecting major distribution hubs in San Jose, Fremont, Hayward, Alameda, Richmond, San Rafael and Fairfield. Companies requiring more space at affordable rates are also seeking space in emerging markets like Livermore, American Canyon and the Central Valley.

“There’s 4.4 million square feet under construction right now and 46 percent is already pre-leased,” offered Olson-Kenny. “The Central Valley has 3.5 million square feet under construction. Last year we were unsure of where the market would be, but we continue to see deal velocity at record highs. The outlook is promising for the Bay Area and Central Valley.”

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