Spec Construction Signals Bay Area Industrial Renaissance

Invesco industrial California Burbank Fremont Los Angeles Stockton

urbandev-industrial-warehouse The Registry real estate

By Joe Gose

Industrial developers in the Bay Area are pursuing speculative construction on the most aggressive scale in more than a decade, rushing to sate demand from food and beverage distributors, e-commerce companies, homebuilding suppliers and other users.

[contextly_sidebar id=”c2a7ec98064c23e88c00359ae5e664eb”]More than 1 million square feet of speculative warehouse space is slated for delivery in 2014 alone in the market, generally along the I-80/I-880 corridor from Richmond to San Jose, according to Colliers International. Developers could also break ground on up to an additional 3 million square feet along the corridor by the end of the year. Los Angeles-based Overton Moore Properties in February kicked off a substantial portion of that expected speculative development, breaking ground on a 700,000 square foot, three-building project in Fremont.

Among other speculative projects, Irvine, Calif.-based Goodman Birtcher recently completed a 375,000 square foot distribution building at the Oakland Airport Logistics Center, and a venture between American Realty Advisors and an affiliate of the McShane Companies is expected to deliver a 575,000 square foot distribution building in Newark’s Cherry Logistics Center early this year.

Earlier this month, KTR Capital Partners and Sponsor Properties acquired a 30-acre site that could accommodate more than 515,000 square feet in the second phase of Pinole Point industrial park in Richmond. KTR officials said in a statement that they would build speculative product on the site given the lack of available modern industrial space, and ground breaking is scheduled for this summer.

Despite the fact that developers haven’t unleashed such a significant speculative spree since the late 1990s, Greig Lagomarsino, an executive vice president in Collier’s Oakland office, isn’t concerned at this point about overbuilding. A busier Port of Oakland is driving some activity, he acknowledged, but e-commerce companies, food distributors and other users want to locate closer to the dense Bay Area populace.

“The market is very healthy—demand is so strong that there just aren’t that many places to go,” said Lagomarsino, who along with another Colliers agent handled Pinole Point’s land sale and is leasing the second phase. “Nobody is moving out of the Bay Area. If anything, job growth is fueling the need for more warehouse space, more office space and more housing.”

Indeed, new development on tap may not be enough. In its fourth quarter 2013 Silicon Valley industrial review, Cassidy Turley estimated that tenants were searching for 5.5 million square feet at the end of 2013 and expected that number to grow in the coming months. Amazon and electrical product distributor OneSource Distributors, for example, are searching for nearly 800,000 square feet between them, according to Jones Lang LaSalle.

Additionally, Cassidy Turley noted that some 20 percent of warehouse product in the market was “substandard or functionally obsolete.”

“A shortage of modern industrial product in the marketplace has thwarted growth in recent years, particularly when it comes to distribution users who found few existing options in the region and typically landed elsewhere,” the brokerage’s report said. “These new projects will likely lease quickly and have little negative impact on local vacancy levels.”

Users absorbed almost 2.8 million square feet of industrial space in 2013 along the corridor north of Fremont, more than twice the net absorption in 2012, according to Colliers. Meanwhile, the average vacancy dropped 171 basis points to 6.3 percent in the fourth quarter of 2013 from the prior year, while the average asking rent climbed about 10 percent to 52 cents a square foot, on a triple net lease basis, over the same period.

The central Silicon Valley submarkets to the south witnessed net absorption of 141,000 square feet in 2013, according to Cassidy Turley. The average vacancy rate in those markets—Sunnyvale, Santa Clara and San Jose—dropped to 7.1 percent in the fourth quarter of 2013 from 8.6 percent in the third quarter, and over the same period the average asking rent climbed a fraction to 53 cents a square foot.

The speculative activity also is occurring alongside a brisk acquisition environment in part driven by industrial property users. In the fourth quarter last year, for example, five owner occupants bought industrial buildings along the I-80/I-880 corridor. Those deals included KZ Kitchen Cabinet and Stone’s acquisition of a 108,000 square foot warehouse in Hayward in December.

Lagomarsino anticipates that users will continue to snap up properties as they become available, and landlords are beginning to take advantage of the demand. In January, officials with San Diego-based Westcore Properties determined that disposing trumped leasing when it came to a 255,000 square foot warehouse in Fremont, and it sold the building to a wholesale furniture manufacturer for $20.8 million.

“The market has picked up, and interest rates are still very attractive,” Lagomarsino said. “If it makes sense, companies that want to control their own destiny are finding it to be a good time to buy. But the reality is that it’s difficult to find buildings to buy.”

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