Kidder Mathews – 2Q 2014 San Francisco Industrial Market Report

The San Francisco industrial market started the year strongly in the first quarter. The larger industrial leases remain in the San Mateo County submarket, with six leases signed ranging from 20,000 s.f. to 70,000 s.f. In San Francisco, no leases above 20,000 s.f. occurred.

Summary

Net absorption, a measure of leasing activity over the past few quarters, was a negative 23,634 s.f. in the first quarter of 2014. Potrero West had the highest positive net absorption of any submarket in the first quarter, with an increase of 31,331 s.f., while Mission Bay/China Basin recorded the highest negative absorption rate with a decrease of 28,307 s.f.

Most of the leasing activity in the first quarter occurred in Potrero West. In the second quarter only two deals above 10,000 s.f. were signed in this submarket. Dolby Laboratories signed a 14,071 s.f. lease for all of 130 Potrero Ave, a Class B, industrial warehouse building. Dolby Laboratories also signed a 13,052 s.f. lease for all of 140 Potrero Ave, another Class B, industrial warehouse building. There were four other leases counted in the submarket, each under ±7,500 s.f., two of which were less than ±6,000 s.f.

The San Francisco industrial market vacancy rate has increased from 3.5% in the first quarter to 3.6% in second quarter. Among all major submarkets, the lowest vacancy rate was 0% for Southern City, Lower SoMa, and Rincon/South Beach. The Bay View/Hunters Point submarket had the highest vacancy rate of major submarkets at 7.7%, a slight decrease from the previous quarter.

The average asking rental rate in the second quarter was $10.75/s.f. on a triple net basis. This reflects a decrease of $0.64 in the adjusted average asking rental rates from the first quarter of 2014. Continuing the trend seen throughout 2013, many industrial spaces that are coming on to the market right now are unpriced, with landlords letting the market set the price. Because of this, the numbers above, which come from a survey of landlord representatives, can be swayed drastically by a few low or high numbers. We feel that the market rate for high quality industrial space in San Francisco is $13.00/s.f., NNN.

Sales Activity

The San Francisco industrial investment market remains relatively quiet. This is mostly due to the fact that much of the high quality industrial product that sellers were looking to move sold in 2012 before the increase in the capital gains tax went into effect in January 2013. Another driving factor in the market is the lack of high quality industrial product left in San Francisco itself.

Sales activity continued the slow pace set in the first quarter of 2014 in San Francisco. 1140 Folsom, a 14,581 s.f., Class C Warehouse building was sold to 1140 Folsom LLC by Marshall & Barbara Platt for $10,500,000, or $720/s.f.

Joso Investments LLC bought 340-342 Harbor Way from the Hsu Family Trust for $2,600,000, or $1,395/s.f. The one-story warehouse property, also known as Utah Industrial Park, is 1,867 s.f.

1731 15th St, a 19,500 s.f. Class C warehouse building was sold for $11,300,000, or $579/s.f. Zepporah Glass Trust sold the property to the Susan Mitchell Irrevocable Trust for the redevelopment of the property into an apartment complex.

We are keeping our eyes on 30-32 Otis, a 20,400 s.f. Class C warehouse building; 828 Brannan, a 15,209 s.f. Class C warehouse building; and 2300 26th St, a 14,810 s.f. Class C warehouse building, all of which have come on to the market this quarter.

Pier 70, a 150,000 s.f. warehouse and 76 acres of land at Candlestick Park is expected to come on to the market soon.

Notable Industrial Leases

• Dolby Laboratories – 130 Potrero – 14,071 s.f.
• Azalinas – 1439 Egbert – 14,065 s.f.
• Dolby Laboratories – 140 Potrero – 13,052 s.f.
• Unknown – 1440 Bancroft – 11,200 s.f.

*Figures and information for this report look only at industrial buildings larger than 15,000 s.f. and were obtained using 6/16/2014 as the cutoff date for the 2nd Quarter. Source: CoStar Data
For more information contact: Reed Payne, Executive Vice President, Brokerage 415.229.8888

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