Finally recovering from the tech bust after 2000, the vacancy rate in the West Bay (San Francisco Metropolitan Division) industrial market is below the U.S. average in both the warehouse/distribution and Flex/R&D segments in the second quarter of 2012, according to Reis. Rents are rising at a moderate pace. The other source of demand for industrial land—redevelopment and adaptive reuse—may be about to restart due to the strength of the retail, apartment, and office markets. That is critical for the large stock of vacant, obsolete space in the market.
Reis reports a 10.1% vacancy rate for 31.8 million square feet of warehouse-distribution space in the second quarter of 2012, down 20 basis points from the prior quarter and 90 from a year earlier. The national rate for this type of space is 12.7%, down 80 basis points year-over-year. For 9.6 million square feet of Flex/R&D space, Reis also reports a 10.1% vacancy rate, down 70 basis points during the second quarter and down 170 year-over-year. The U.S. average is 14.7%, down 80 basis points from a year earlier.
Cushman & Wakefield reports a 6.6% overall vacancy rate for industrial space on the peninsula, down 50 basis points from a year earlier, but little changed from the start of 2012. This source includes Palo Alto, over the border in Santa Clara County, in its peninsula market. Cassidy Turley reports a 9.6% vacancy rate for 41 million square feet of industrial space in San Mateo County, up 50 basis points from the prior quarter, along with a 12.3% vacancy rate for 19.4 million square feet of R&D space there, down 50 basis points. Reis predicts the warehouse/distribution vacancy rate will end 2012 at its current level, and then decrease modestly over the next few years to 9.6% in 2015. Flex/R&D vacancy is forecast to edge up to 10.4% at year-end, then edge back down starting in 2014. Having improved substantially, in other words, occupancy is forecast to change little going forward.
SUPPLY AND DEMAND
Warehouse/ distribution net absorption has been strong thus far in 2012, with a year-to-date reading of plus 232,000 square feet, including plus 51,000 square feet in the second quarter. Although the Reis forecast is tepid for the rest of the year, with a 2012 total of just 240,000 square feet predicted, similarly sold demand totals are forecast for 2013 and 2014. Following just 10,000 square feet of new supply for the three years from 2010 to 2012, Reis predicts 377,000 square feet will be added in 2013 and 2014 combined. No warehouse distribution space is under construction; the 475,000-square-foot new San Francisco Wholesale Market is the most prominent planned project.
Flex/R&D net absorption has been generally positive since late 2012, with a second quarter reading of plus 66,000 square feet. Reis predicts a slowdown for this type of space as well, with net absorption ending 2012 at 44,000 square feet and 52,000 in 2013. A 192,000-square-foot building, one of the Gilead Sciences complex in Foster City, is expected to complete construction this December. Three additional buildings with 186,000 square feet are also planned. Altogether 313,000 square feet of Flex/R&D space is forecast to be added from 2013 to 2016. Net absorption is expected to be similar.
“While the Bay Area’s tech sector remains hot, the region’s industrial marketplace continues to struggle with a sluggish economy,” according to Cassidy Turley, which recorded negative net absorption in San Mateo County in the second quarter. Although net absorption was slightly positive for San Mateo Flex/R&D space, “we are going on nearly four years since the financial crisis of September 2008 and in the intervening 15 quarters, the San Mateo R&D market has recorded just five quarters of positive growth.” Industrial net absorption was strongly positive in San Francisco County according to Cassidy Turley.
Warehouse/ distribution rents resumed a slow upward climb in the second quarter, after the previous two quarters were flat. The average asking rent increased 0.2% to $8.41 psf, with the average effective rent up 0.6% to $7.79 psf. The year-over-year gains are 1.4% and 2.4%, respectively. These rent levels are far above the U.S. averages of $4.66 psf asking and $4.18 psf effective, but well below where they were before sharp decreases in late 2010 and early 2011. Reis predicts rents will rise by around 1.0% this year, but far stronger increases in the vicinity of 5.0% are forecast for each subsequent year through 2016.
Rent gains have been stronger in the Flex/R&D segment, but the second quarter saw an identical 0.2% increase in the asking average to $13.82 psf, and 0.6% in the effective average to $12.68 psf. The year-over-year gains were 2.1% asking and 2.7% effective. Although the asking average is forecast to rise just 0.9% for all of 2012, the effective average is expected to rise 1.7%. Increases of 3.0% to 4.5% per year, roundly speaking, are forecast to follow.
“High-tech net average asking rents have increased 6.3% from the end of 2011” on the peninsula to $20.28 psf according to Cushman & Wakefield, but overall industrial rents are still down from a year earlier. Industrial rents “have actually remained extremely stable in San Mateo County,” according to Cassidy Turley, with the current asking average at $8.64 psf. But the market is now weak. “Expect increased downward pressure on rents, especially if vacancy levels cross the 10.0% mark,” according to this source. For R&D space in San Mateo County, Cassidy Turley reports an average asking rent of $25.92 psf. “While landlords may be frustrated that rents have been slow to return to pre-recession levels, the good news is that today’s rate marks an improvement” compared with three months ago. “Performance has been erratic, with the market seemingly taking two steps forward and one back.”