Oakland Industrial Market to Lead Nation in Rental Rate Growth as Demand Outstrips Supply

Prologis, Duke Realty
Photo by Ryan Parker

By Jon Peterson

The Oakland commercial real estate market is hitting great strides, and according to one industry report, the East Bay city is expected to lead the nation in industrial rental growth over the next five years. This trend will make other west coast markets attractive, as well, but Oakland’s growth is poised to hit 40 percent.

A recent report by CBRE Econometric Advisors, Oakland’s growth will lead nation in projected industrial rent growth between 2020 and 2025. The next closest market is Los Angeles at 35 percent and Newark, NJ at 32 percent, followed by Sacramento at 30 percent and Seattle at 29 percent.

The increase in high-wage earners in the region over the last cycle has presented a strong trend for e-commerce, wholesale and third-party logistics warehouse demand, raising industrial rents by 11 percent since the end of 2018, according to the report. With one of the lowest warehouse vacancy rates in the nation, the Oakland market has limited available Class A inventory to satisfy this demand growth, with supply constraints creating an environment for rent growth, stated CBRE.

But there are several other factors driving the increase in demand. “Tenant demand remains very strong given the demand for last mile delivery, coupled with demand from other sectors including home improvement, which is driving low vacancy rates. In addition, entitling new developments remains challenging,” commented Rebecca Perlmutter, executive vice president of institutional properties for CBRE west coast markets.

Amazon continues to be the major player on a national basis. According to CBRE, this tenant has accounted for 78 million square feet or 16 percent of national demand in 2020 for units over 100,000 square feet. The next highest tenant was Walmart with 8 million square feet, or 2 percent of demand.

Elsewhere around the Bay Area, the region continues to have a supply-demand imbalance with a tremendous amount of capital chasing too few deals, even though the reports state that sales volume is down. The sales volume in this region last year was at $3.8 billion, according to Real Capital Analytics. This compares to $4.9 billion worth of transactions that were completed in 2019. In the Central Valley, deal were also down in 2020. They went from $850 million in 2019 to $818 in 2020. This could be more a factor of lack of product to be purchased than a sign of lack of demand for industrial assets.

“The expectation is that industrial cap rates will continue to compress in 2021,” added Perlmutter. “We are seeing cap rates in the mid 3 percent range in Southern California, and this will migrate to the Bay Area once we bring some core deals to market. 

“Cap rate compression is supported by strong rent growth, continued user demand, lack of product in the market and attractive debt in the mid 2 percent range, ” said Perlmutter.

As a result, the market is also witnessing new players enter or expand their demand for industrial real estate across the region and Western United States, according to several sources with direct knowledge of the industrial market drivers and investors seeking to deploy capital. Real estate managers that had previously targeting office and retail assets are now aggressively pursuing industrial product. Family offices are also shifting from the stock market and other asset types into industrial real estate.

West Coast Commercial Real Estate News