Here's How Tech Is Changing Bay Area Industrial
New technologies are bringing big changes to industrial real estate, especially in the Bay Area, according to a new white paper from Newmark Knight Frank.
The once-limited San Francisco industrial sector, for instance, has ballooned thanks to production, distribution and repair space, all of which is in high demand for expanding hardware companies like Samsara, which makes sensors, and aerospace startup Capella Space, Newmark Knight Frank San Francisco Director of Research Andrea Arata said.
The change, which Arata attributes partly to the need for companies to access the city’s tech workforce, has happened quickly. San Francisco had less than 50K SF of industrial demand in the market at the beginning of 2017, but over 1.7M SF by the end of 2020, according to NKF’s report.
Also although SoMa has seen much of the demand thus far, changing needs have required intensive build-outs and strong rent growth, Arata said. Rents for Class-A industrial space grew about 36% in S.F. between 2017 and 2019, NKF said in its report.
“Rents have gone up considerably as build-outs and tenants have gotten more sophisticated,” Arata said. “These companies can’t necessarily walk into what had been formerly been an auto-repair place. Their requirements are going to be different."
Aside from just boosting demand for industrial commercial real estate in San Francisco proper, tech has also affected what qualities industrial real estate can and must offer in the Bay Area and other markets, both Arata and Altus Group Senior Director Pauline Hale said.
Last-mile needs and e-commerce in general have resulted in companies like RightHand Robotics, which provides short-term order-fulfillment machinery, coming into the fold, as distribution centers grow in both complexity and height. The number of industrial developments coming online this year with ceiling heights of 40 feet or greater is expected to be more than double the total in 2019, according to NKF.
Also gradually coming into play in the U.S. are multistory warehouses, sought out as attractive sites proximate to population hubs. “Scarcity sparks creativity,” Hale said, pointing to Prologis’ landmark Seattle facility as a precursor to more multistory development.
Likewise, on-demand warehouse marketplaces like Flexe have arisen with e-commerce growth, taking advantage of smaller available spaces within existing storage facilities. But even with on-demand and pop-up distribution centers on the rise, experts see a nationwide need for new Class-A industrial product still present. A CBRE report from late 2018 concluded that the “vast majority” of warehouses in the U.S. were “ill-suited for the demands of e-commerce.”
“Something very dysfunctional but close [to population hubs] still might not be the answer,” Hale said.