How Tesla And Amazon Are Driving A Boom In Bay Area Industrial
Industrial development is fundamentally different from other sectors of real estate. Bisnow spoke to JLL VP Kelly Gray about key trends driving industrial real estate in the Bay Area and her predictions for the market in the 2020s.
“Industrial is typically a lower-cost use of the property; office and residential rents command higher land costs per SF and provide a higher tax basis,” Kelly tells us while analyzing the sector’s “below the radar” feel. The general consumer isn’t aware nor regularly thinks about how products end up on store shelves or doorsteps. “The concept that it takes over 70M SF of real estate in the Bay Area to make that happen is not widely known,” she says. Most of all, industrial design tends to prioritize function over form. “Industrial just isn’t as sexy as office and residential,” she says. “I personally love seeing a perfectly built, high clear, concrete tilt-up industrial facility, but I think I’m in the minority.”
Kelly helps her clients make important decisions on industrial real estate in Silicon Valley. Her specialties include designing an overarching real estate strategy, orchestrating meticulous location searches and assessing supply chain networks. She’s repped tenants such as Tesla, Navistar and Golden State Foods, to name a few. Kelly also has worked with leading developers such as Prologis, Duke Realty and Digital Realty Trust.
Despite the low-key feel, landmark industrial transactions are setting the pace for wider real estate across the region. Apple, for example, transacted 600k SF of industrial, while Tesla turned heads by inking a 1.2M SF deal. The action wasn’t limited to tech companies. Kelly points to a Southern California-based furniture retailer that opened its first Bay Area store in Fremont. This deal also “took a sizable chunk of industrial/warehouse space” off the market.
Kelly says these transactions point to larger trends in industrial use. The desire on the part of e-commerce companies to get closer to the end user for parcel delivery is driving acquisition of properties closer to their customers. As the Bay Area population keeps rising, firms will need more distribution and warehouse space to support more people. The birth of high-tech auto in the Bay Area has companies like Tesla and Google “taking down industrial space for testing of autonomous vehicles.”
"Industrial and office markets are interacting in some interesting ways in the region,” she says, "with older industrial space being repurposed by non-manufacturing or retail companies." Bisnow has reported on this trend in the Valley: Google and Facebook between them have consumed more than 2M SF in Menlo Park and Sunnyvale over the last few years. In response, JLL plans to offer state-of-the art industrial properties such as the Silicon Valley Industrial Center (above) to relieve this acute space crunch.
Effective management of transportation networks will be essential to industrial real estate, Kelly says. She singled out the extension of BART into Fremont, the Port of Oakland’s revitalization, and the construction of BNSF and UP intermodal rail hubs as game-changers.
The BART extension has a “tremendous effect on the area,” since it broadens the employee base but makes it harder to compete for space. Oakland’s port will have an even wider impact than rail improvements since it will add a third major port (besides LA and Long Beach) in California. The Port of Oakland brings more industrial demand to the area, she notes. Perhaps most important, BNSF and UP intermodal rail hubs in Stockton and Lathrop lead to the creation of industrial clusters in Central Valley. “Over 100M SF of industrial product is there with millions more being developed as we speak,” Kelly says.
Getting regulation to support the industrial spine of the Bay Area was essential, according to Kelly. Nearly 10M SF of industrial space has been taken out of the market since 2011 due to rezoning industrial land for “a higher and better use.” The result is an upward price spiral for industrial product. Local regulations on truck traffic also curb industrial development, especially for big-box industrial (250k SF, high clear distribution centers), Kelly says.
Where will industrial real estate be in five years? Kelly expects the industrial market will continue experiencing record rental rates and low vacancies as office and residential demand cannibalize industrial space. The Central Valley will have a flurry of development to cope with escalating costs. “If property costs continue to rise,” she predicts, “the Bay Area may be the first market to see multi-story industrial in the US.”