By Meghan Hall
While it is no secret that the emergence of Silicon Valley as the world’s premier technology hub had a monumental impact on the local office and residential markets, it has also bolstered the Bay Area’s industrial market. With the emergence of the gig economy, the entrenchment of e-commerce and a desire by companies to not just invent, but produce technology in the Bay Area, industrial assets both old and new have taken on new value. According to a recent white paper by Newmark Knight Frank, as technology companies and tech-centric firms evolve, so has their need for industrial space.
“Technology has changed over time; we have a different type of technology tenant than we did 20 years ago,” explained Newmark Knight Frank’s Director of Research Andrea Arata. “As tech is evolving, so are the tenants. A lot of the kind of tenants we are seeing, they need more production; they’re building things or delivering as opposed to creating [in the cloud].”
NKF points out that venture capital firms invested about $19.3 billion in supply chain technologies in 2018, setting an industry record. Innovations in the supply chain are one of the largest influencers of the Bay Area industrial market, as distributors such as Amazon are looking for large assets in highly urbanized markets.
“I think you only have to look as far as the number one occupier of space over the last 12 months, by a long shot: Amazon,” emphasized Steve Kapp, the executive managing director for NKF’s San Francisco East Bay Industrial Division, who added that Amazon thus far has leased over 4 million square feet of industrial from San Jose to Richmond in the last six months alone. “That in itself is a fundamental change, that you got a technology company, really, whose now by a mile the biggest occupier of industrial space in the Bay Area.”
Additionally, technology firms, life sciences companies and those in advanced manufacturing—such as those in the autonomous vehicle or robotics industries—are also creating demand for newer, high-end industrial spaces that specifically cater to their needs, placing an emphasis on clear heights, high-tech security and communication infrastructure.
In San Francisco in particular, demand for Class A industrial space has skyrocketed over the course of the past several years. Requirements grew from less than 50,000 square feet at the start of 2017 to more than 1.7 million square feet by the end of 2019, and asking rents for Class A industrial space have grown 35.9 percent. As a result, 1.1 million square feet of Class A industrial space has been renovated or developed in that time, and an additional one million square feet of space has been proposed over the next three years.
The desire of these companies to be in Silicon Valley is the result of being close to a key component of innovation: top talent. In order to be innovative, companies need creative employees with the necessary tech know-how.
“Rents have gone up—a lot,” stated Arata. “We are seeing a lot more landlords upgrading their spaces to accommodate high tech tenants. The energy is different; they need to fit [their assets] for companies that have a lot more computer power.”
In addition to higher levels of security, clear heights, communication infrastructure and other innovations, new and updated industrial stock has been catering towards firms looking to take larger blocks of space. Across the United States, the number of new industrial developments exceeding 500,000 square feet has exceeded 250, up from just under 150 projects in 2016.
The Bay Area itself is home to several of these developments. Bridge Development Partners has recently kicked off construction of its 722,040 square foot Bridge Point Silicon Valley industrial development in Milpitas. Upon completion, the campus is slated to be the largest industrial development in the South Bay and Silicon Valley.
Also in Milpitas, Joey McCarthy of Los Gatos, Calif.-based McCarthy Ranch is working to complete the second phase of the McCarthy Creekside Industrial Center. In November of 2019, The Registry reported that Amazon leased 343,000 square feet as part of the second phase. The first phase of the project has been leased to Apple and San Francisco Motors, who took 314,000 square feet and 136,000 square feet of space, respectively.
“We are in the third or fourth year of the biggest industrial building boom that we have had since the 1990s, so we really had no new industrial construction from the late 1990s until 2016,” said Kapp. “People are really building a completely different type of product today compared with 20 years ago. All the features that are in the modern industrial building are very different than assets from the eighties or nineties, which is what most of the Bay Area’s inventory is.”
However, the Bay Area’s older existing stock is still thriving, noted Kapp. Much of this stock was originally constructed in the 1980s and 1990s, and while in other markets those assets would be deemed unusable, in the Bay Area they provide a unique opportunity for smaller and mid-market businesses, as well as more “traditional” industrial tenants.
“In the Bay Area it is a little bit different because [older assets] continue to do well and thrive, because those buildings have been designed and have the ability to break down into smaller spaces; they already have that set-up,” said Kapp. “The new product is not being built to divide down into that, and I don’t see that ever being that way, so those [older] units become pretty attractive. None of the new product can accommodate those types of tenants, so the demand for them is still quite strong.”
With these fundamentals in mind, the Bay Area’s industrial submarket continues to thrive with both old and new assets garnering the attention of a wide variety of companies.