Industrial In and Out Moves
Industrial In and Out Moves
Assuming their accustomed spot as trailblazers, Bay Area companies are leading a nationwide surge claiming industrial space.
Scarce warehouse and distribution space is coveted not only by businesses engaged in e-commerce, but also by more traditional brick-and-mortar companies like furniture retailers and industrial piping manufacturers rising with the swelling economic tide. That includes Coaster Co., a furniture importer and distributor; Ferguson Enterprises Inc., a wholesale plumbing goods supplier; Williams-Sonoma Inc., purveyor of upscale food, kitchen merchandise and table top items; and Tesla Motors, manufacturer of high-end electric vehicles.
E-commerce activity in industrial space is on the rise locally and nationally, now comprising 10 to 15 percent of all leasing activity in the U.S., compared to less than five percent in 2011, according to Chris Caton, vice president and head of research at Prologis Inc., a San Francisco-based developer and manager of logistics and distribution industrial space.
Because of burgeoning demand, vacancy rates are shrinking while rents escalate for the dwindling amount of suitable industrial space in the region. Developers are scrambling to build new buildings, focusing mainly on the lower-cost East Bay and Central Valley. The eastward push is encouraged by the conversion of former industrial space into high-tech office and R&D facilities in the Silicon Valley corridor of northern Santa Clara and San Mateo counties.
“What’s unique is that the Bay Area is a shrinking market because of the trend toward ‘higher and better use’ of converting R&D facilities, for example, into high-tech manufacturing or office facilities.” Chris Caton, Vice President and Head of Research at Prologis Inc.
“And this is not just happening in the Bay Area, it’s all over the nation and globally,” Caton said. Prologis manages a property portfolio valued at more than $29 billion worldwide. He said nationwide, the net absorption of industrial space this year will be 225 million square feet, with about 170 million square feet of new space being built.
“The Bay Area is one of the top markets globally. What’s unique is that the Bay Area is a shrinking market because of the trend toward ‘higher and better use’ of converting R&D facilities, for example, into high-tech manufacturing or office facilities. That’s happening all over, but especially in the Bay Area,” said Caton.
Elizabeth Kauchak, Prologis vice president and market officer, said local industrial rents have increased more than 26 percent during the past year. Her company’s monthly Industrial Business Indicator for May said that nationally, demand is up and vacancy rates down. But the trend is more pronounced in certain areas.
“High-quality space in Los Angeles, the San Francisco Bay Area and New York-New Jersey is particularly scarce,” the report said. “Within these markets, we’ve seen a recent and notable tightening in infill submarkets. We expect growth to spill over into regional markets and activity to rise in small spaces as owners of small businesses, in particular, gain greater access to credit and in turn become increasingly active participants in the economic expansion.”
Local industrial real estate specialists are very busy these days.
“The market across the board is doing great, we see demand in all sectors, but the warehouse distribution segment is super hot right now,” said Craig Hagglund, managing partner in the Oakland office of Lee & Associates, a Newport Beach-based real estate services firm. “We see a lot of demand in Hayward, Union City, Fremont and Newark. There’s also a big upturn in Oakland and Richmond. Especially a big demand for Class A space.”
Class A is newly built or well-appointed existing industrial space less than 30 years old that comes with lavish room for trucks and employee parking, high ceilings and the latest in high-tech features.
Hagglund said there hasn’t been so much industrial construction locally since the 1980s. But it’s barely keeping up with demand. Kauchak of Prologis said the region recorded a net absorption rate of 3.4 million square feet of industrial space in 2014, with another 1.6 million square feet set for construction this year.
“We’ve just had an explosion of new product,” Hagglund said. “This couldn’t have happened in 2009 or 2010. We just got to the point where the [speculative] products penciled out.”
Hagglund said industry vacancy rates have plunged to low single digits in most of the region—as low as three percent in some places. He said average asking lease rates have soared 20 percent in just the past year. The deal to bring Nippon Express USA to a 112,000-square-foot space in Hayward brought a near all-time high lease rate of 54 cents per square foot triple net, Hagglund said.
Among the biggest deals during the first quarter for Hagglund’s office were in Hayward: the sale of 548,179 square feet of industrial space on Hathaway Avenue for $31.5 million to DCT Holdings Corp., and a $46 million purchase by BART of 446,000 square feet on Whipple Road.
“The DCT deal is an example of a product that was a tough sell four years ago,” Hagglund said. “DCT sees these two buildings as a redevelopment opportunity. They will lease out space to another company. They’re bullish on the market.”
Echoing Hagglund’s views is Greig Lagomarsino, executive vice president and corporate director for logistics and transportation solutions for commercial real estate brokerage Colliers International. He said the East Bay—with spillover into the North Bay and Central Valley—has become a highly competitive industrial market.
“The demand is strong throughout the region,” Lagomarsino said. “Every market is experiencing well-above-average demand and supply is not keeping up. Multiple parties are interested in many properties, so it has become very competitive.”
For Lagomarsino’s office, some of the top deals on existing space this year include the 266,825-square-foot Greenville Business Center in Livermore bought by IPT Acquisitions, a subsidiary of Industrial Property Trust Inc., and the 300,584-square-foot Central Pacific property in Union City purchased by Terreno Realty Corp. Sale prices were not disclosed.
Not surprisingly, competition is stiff for Class A space, Lagomarsino said. Rents in that category are increasing, he said, with new Class A space ranging from 55 to 65 cents per square foot, while high-quality existing space is in the 50- to-55-cent range.
Though new industrial space is rising throughout the market, Lagomarsino said the biggest challenge in the Bay Area is finding sufficient land to build. Caton of Prologis said there also are other factors complicating construction.
“It’s just harder to put up buildings these days,” Caton said. “Projects are bigger and more complex. The whole process takes more time than it did a few years ago.”
Prologis has been busy trying to ease the industrial space crunch. The company started construction on the Prologis International Park of Commerce earlier this year in Tracy, planned for an eventual 19 million square feet. Its tenant list includes FedEx Corp. and Medline Industries Inc. Prologis had already constructed a separate 1 million-square-foot distribution center for Amazon.com Inc. nearby. Also, the company broke ground in May on two speculative distribution facilities totaling 623,00 square feet in Fremont.
In April of this year, the San Francisco-based industrial developer and owner announced that it was buying competitor KTR Capital Partners for nearly $6 billion. The 60 million square foot operating portfolio that KTR owned comprises of 322 properties and aligns with Prologis’ investment strategy with approximately 95 percent overlap with its existing U.S. portfolio, Prologis said in a statement after the purchase had been completed. KTR was an active developer and owner in the Bay Area, as well. As the field of opportunities narrows, it seems so too will the field of participants.
