Vacancy Rates Continue To Fall For East Bay Industrial
Developers cannot build industrial fast enough in the East Bay. Increased demand and a lack of available high-quality space has new construction leasing up long before buildings are delivered.
Last-mile fulfillment and next-day delivery services and the proximity to the Port of Oakland, which is the fifth-busiest port in the country, have helped fuel a healthy demand from the likes of Amazon, FedEx and UPS. Tesla’s expansion has sparked more demand from ancillary service providers, such as SAS, for warehouses close to Tesla’s factory.
Another factor shifting demand toward newer construction is a rise in available clear heights. Most new warehouses offer clear heights of 32 feet or 36 feet, which allows tenants a lower occupancy cost per square foot.
Only about 8% of inventory with more than 50K SF has the desirable clear heights of modern distributors, according to CBRE data. Modern distributors typically require at least 250K SF, 32 foot heights, 52-by-52-foot or 60-by-50-foot bays and land for employee parking.
Over the last three years, lease rates and building sales have increased 25% to 30%, according to CBRE senior vice president Mike Barry. There has been a huge land rush for industrial from Richmond to Fremont and out to Livermore for the development of Class-A logistics and advanced manufacturing space.
Overall vacancy rates for logistics/manufacturing space in the 880 industrial corridor and Tri-Valley markets have been in the low single-digits ranging from 1% to 3%, Barry said. New Class-A logistics and advanced manufacturing buildings are pre-leasing 90% of the time.
Developers are building large warehouses throughout the East Bay. Prologis, Overton Moore, LDK Ventures and Conor Commercial have been among the most active in the region. About 2.1M SF is under development and about 277K SF was pre-leased at the end of Q1 2017.
With proposed developments added in, the East Bay could get upward of 12M SF of new industrial through 2019. About 750K SF of new construction is expected to break ground at the Port of Oakland in 2017.
Since Q4 2012, vacancy rates for the Oakland/East Bay market have declined, reaching rock-bottom levels of 1.9% during Q1 2017, according to CBRE’s latest data. Comparatively, vacancy rates were about 9% in 2012. This is the first time the market’s vacancy rate has fallen below 2% in CBRE’s 30-year record.
Within the largest submarkets, Hayward, San Leandro and Oakland had vacancy rates below 1%. These three markets make up nearly half of the net rentable area within the Oakland/East Bay industrial market and have a total of 1.4M SF of industrial under construction, more than half of the total projects in the works.
Last quarter was the second-highest first quarter net absorption rate for industrial within the last five years. Net absorption reached 958K SF, which included two large leases totaling 409,522 SF. Positive net absorption has lasted 16 consecutive quarters.
By the end of last quarter, requirements of more than 100K SF made up 85% of the total tenant demand of 7.1M SF. Only 7.7M SF is available across all submarkets, pushing tenants to consider the under-construction developments.
Rents rose 4.8% to $0.88/SF for a triple net lease. Warehouse and manufacturing exceeded their peaks for eight quarters and three quarters, respectively. Warehouse rents are now $0.76/SF, with manufacturing at $0.85/SF. Research and development matched its highest rent since Q4 2000 at $1.26/SF.
Among the largest leases during the quarter were Penske Logistics’ 235K SF lease in Union City, Iron Mountain’s 139K SF lease in Hayward and Uriman’s 125K SF lease in Union City. Of the 1.7M SF leased during the quarter, 31% was for logistics companies, followed by 19% in tech.