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AI Is Driving An Advanced Manufacturing Boom In The Bay Area

The Bay Area has never been known as an industrial real estate hub, but with a specialized talent pool and a wave of new technological developments, the area is amid a spike in demand for advanced manufacturing space.

Roughly half of the 1.2M SF of industrial space under development in Silicon Valley is tagged for advanced manufacturing, according to CBRE data.

Major developers Prologis and Hines both have projects either underway or recently completed that seek to capitalize on a fresh wave of demand from artificial intelligence and the microchips needed to power the technology.

Prologis Milpitas

“We love building and owning advanced manufacturing buildings because the demand is high,” Prologis Vice President and Bay Area Market Officer Matt Ebner told Bisnow. “We also love to convert our existing logistics buildings into advanced manufacturing facilities. They typically lease at higher rents than traditional industrial assets.” 

Asking lease rates for these spaces reached $1.99 per SF in the first quarter, according to CBRE, while asking rates for typical manufacturing spaces and warehouses were $1.71 per SF and $1.44 per SF, respectively. 

CBRE defines advanced manufacturing facilities as assets built after 2000, with a minimum of 3,000 amps of power and at least 22-foot clear heights. Such facilities make up about 10% of the 109M SF of industrial properties in the valley, and these assets often command premium prices, according to CBRE’s newly launched advanced manufacturing research category. 

The spaces are suited for companies building microchips and other technology needed for the growing clean tech, electric vehicle and artificial intelligence industries. 

The proximity to tech firms in need of not just chips, but servers and other pieces of hardware to support their software and programming development has developed a talent pipeline that “is different than anywhere else in the country,” said Matthew Taylor, an executive vice president for CBRE.

Hines and Oaktree Capital broke ground on this advanced manufacturing facility in Fremont last week.

For advanced manufacturing facilities in Silicon Valley, vacancy stood at 4.5% in Q1.

Server manufacturer Supermicro offered some insight on pricing with its Q1 acquisition of a 292K SF facility in San Jose for $80M, one of several large deals driven by the growth of AI in the region. In Q4, OpenAI and Anthropic also signed leases for office space.

On the leasing side, a new lease at 2055 S. Seventh St. in San Jose was among the largest transactions in Q1, according to CBRE, with 457K SF leased. CBRE did not disclose the name of the tenant. 

Big names in advanced manufacturing like Maxar Technologies are also recommitting to the area. Maxar renewed its lease for 158K SF at 1989 Little Orchard Drive in San Jose, and Quanta Manufacturing re-signed for its 120K SF at 41707-41001 Christ St. in Fremont.

The development pipeline for these kinds of projects is fuller than it has been in years, with a shortage dating back to the pre-pandemic days.

“There’s been a lack of new development in this product type since 2019, so I think we will see more of it here,” Ebner said. “And from what we've seen, cities and jurisdictions like this type of product.” 

Among the projects under development is Hines' Milmont building at 49000 Milmont Road. The project will total 267K SF when it comes online, contributing to the 605K SF of manufacturing projects under development in the Bay Area. Development will continue over the next few years to meet the growing demand among advanced manufacturers in the valley.