Industrial market rolling with strong demand, low vacancy.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY OF 2016
But these days are not typical: Quality warehouses and distribution centers are being snapped up like hot cakes in the Bay Area and vicinity.
“The industrial market is on fire,” said Greig Lagomarsino, Oakland-based executive vice president for commercial real estate services firm Colliers International. “New buildings are coming on line and getting leased prior to construction completion. That’s unusual.”
The region’s market is rolling with robust demand, historically low vacancy, ascending rents and revved-up development activity, reflecting a bullish national scene driven by job growth, e-commerce sales and other factors.
One concern, though, is a lack of available land in the Bay Area for high-end construction to keep up with all that demand.
“There’s very little inventory of Class A, modern buildings [while] there’s very strong demand,” Lagomarsino said. “Vacancy is very low—in the single digits. Markets that have been secondary or tertiary, are now very viable.”
David Haugen, Emeryville-based vice president with Denver-based industrial real estate firm DCT, agreed: “Whatever is getting built is getting leased right away. Most of the new projects are occurring in traditional secondary markets such as Richmond and Fremont and are done very well. That’s an indication of how well the market is doing.”
Over the past couple of years in the East Bay alone, Haugen said, about 6 million square feet of new space have been leased at completion or shortly thereafter.
Of another 1.5 million square feet under construction in the East Bay, he said, more than 80 percent have been pre-leased already—including DCT’s redevelopment project on Hathaway Avenue in Hayward.
DCT has secured a single tenant—which is associated with the e-commerce sector—for the 297,000-square-foot warehouse expected to be completed by the end of July, he said.
DCT has been redeveloping an existing building into a Class A structure with loading docks, trailer parking, an office area to suit, a new roof and other upgrades.
Other key new projects include the Oaks Logistics Center in Livermore, where online-retail giant Amazon.com had an interest in leasing one of three buildings before electric-vehicle maker Tesla agreed to occupy 1 million square feet. This project is a joint venture between Dallas-based developer Trammell Crow Co. and Toronto-based real estate services firm Bentall Kennedy.
Amazon eventually ended up taking 225,000 square feet in the Pinole Point Business Park, an 80-acre development owned by San Francisco-based industrial developer Prologis in Richmond. Prologis also built the new 624,000-square-foot, two-building Silicon Valley Logistics Park in Fremont.
According to Colliers, the Oakland metropolitan area saw the vacancy rate fall to 2.1 percent in the first quarter of this year from the already low 3.9 percent in early 2015. Over the quarter, average asking rents increased from 71 cents to 80 cents per square foot a month.
Other parts of the Bay Area have shown similar trends. On the Peninsula, vacancy has remained at extreme lows—standing at 2.8 percent in the first quarter, according to Colliers, while rents were $1.02 per square foot a month—up nearly 16 percent year-over-year.
Silicon Valley vacancy has also continually fallen over recent years—dipping to 2.3 percent in the first quarter, Colliers said, while rents were $1.11—a year-over-year increase of 41 percent.
The local scene reflects—even outpaces—what has been happening nationally. According to Colliers, vacancy nationwide declined to its lowest rate in more than a decade—to 6.3 percent in the first quarter. Rents across the country were at the highest point since late 2008, reaching $5.52 per square foot annually.
Among the drivers behind the surging market is job growth, particularly in sectors closely tied to industrial real estate. U.S. employment in goods, construction and manufacturing companies rose by 160,000 workers in April while the trade, transportation and utilities sector—the heaviest users of industrial space—added 475,000 jobs between early 2015 and 2016, according to Colliers.
The growth in online sales has also been a factor. Over the past three years, e-commerce-related tenant requirements have accounted for more than 40 percent of industrial net absorption nationwide, according to a report by commercial real estate services firm Cushman & Wakefield.
Package-delivery company UPS, for instance, has taken 300,000 square feet in Hayward and 750,000 square feet in Lathrop, according to Lagomarsino.
Of the 6 million square feet of new industrial space in the East Bay, Haugen added, more than 30 percent involved e-commerce-related activity.
As industrial inventory is projected to only continue to tighten in the Bay Area, transforming existing sites into quality property is seen as a solution.
“We’re out of land,” Lagomarsino said. “We need more redevelopment.”
DCT’s redevelopment project in Hayward is a prime example of how to address the supply shortage, Haugen said. “We need to be creative.”
Otherwise, developers and companies will continue to look around the periphery of the Bay Area such as Tracy, which has quickly become a favorite for industrial development.
Tracy is home to Prologis’ International Park of Commerce, which broke ground in November 2014 and is envisioned to have about 20 million square feet at full build-out. DCT also has its sights on Tracy, pursuing a 795,000-square-foot project on West Arbor Avenue.
The Central Valley is appealing not only because of available land. Companies with an industrial presence in this region can still serve its customers in the Bay Area while being able to reach across the Western states, Haugen said.