Q2 2012 San Jose, California Industrial Market Trends

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Q2 2012 San Jose, California Industrial Market Trends

“The Santa Clara County marketplace remains the region’s strongest” for R&D space, states Cassidy Turley in a second quarter report on San Francisco Bay Area R&D real estate. For the large, 64.6-million-square-foot Flex/R&D sector tracked by Reis, net absorption for the first half of the year was 348,000 square feet alongside no new supply additions. July followed with net absorption at 74,000 square feet. Following large earlier losses, rent growth turned positive in early 2011 and has remained so since. At $13.70 psf and $12.17 psf, respective mean asking and effective lease rates for second quarter were up 0.6% and 0.7% from a quarter earlier, and were up 1.5% and 2.0% since year-end following notable gains in 2011. According to Colliers Turley, meanwhile, the relative affordability of R&D space in Santa Clara County relative to other Bay Area submarkets is both a cause for the strong demand seen in Silicon Valley and a challenge for other regional markets. Flex/R&D vacancy, though still elevated, ended the latest quarter at 17.5%, down 20 basis points for the period, down 60 year-over-year, Reis reports. July followed with a 10-basis-point decline along with essentially flat rent growth.

Construction, meanwhile, has not caught up with the positive turn taken by demand and rents and the downward course taken by the vacancy rate. No competitive industrial space of any description will complete construction in 2012 and no projects were underway per the end of the latest quarter. The Flex/R&D sector projects in the pipeline include 1.2 million square feet of space proposed for 14 buildings at Evergreen business park in the South San Jose submarket. With market and high-tech business trends as a strong as they are, however, the hiatus in construction may not last much longer, other factors allowing. According to a Colliers International executive as cited by the Silicon Valley/San Jose Business Journal in August, more than 33.5 million square feet of new office and R&D projects are in the pipeline. “That’s a lot of potential construction, and that obviously shows that developers are confident that companies are going to want to grow, expand and relocate here.”

In a reverse of what is typical for the nation’s industrial real estate markets, the warehouse/distribution sector, at 34.6 million square feet, is dwarfed by the much larger Flex/R&D market. Construction, moreover, has not been a factor in this sector for a considerable period. Net absorption for the first half of the year was 131,000 square feet. Vacancy ended the second quarter at 13.3%, down 10 and 60 basis points for the quarter and year-over-year, respectively. At $6.89 psf and $6.26 psf, respective second quarter average asking and rents were up 0.3% and 0.5% for the period and were up 0.9% and 1.5% year-to-date following increases of 1.5% by each in 2011. July followed with 71,000 square feet of positive net absorption, a decline in the vacancy rate to 13.1% and respective gains of 0.1% and 0.2% in the mean asking and effective lease rates.

“Demand [for R&D space] remains extremely strong in the South Bay and we don’t see that changing over the final half of 2012,” states Cassidy Turley. Reis expects a substantial advantage of net absorption over new supply all told in 2012 for the Flex/R&D market. Respective gains of 3.3% and 4.0% are projected for the mean asking and effective rents for the year. Strength should prevail as well in the warehouse/distribution sector.