In 2018, the greater San Francisco Bay Area was the best-performing industrial real estate market in the country, according to an article in the Silicon Valley Business Journal. And globally, the Bay Area was second only to Northern China, which took the number one spot.
The Bay Area saw net effective rent growth in the mid-teens. This was up from strong single-digit growth in 2017. Rents across the country were pushed higher by historically-low market vacancy rates.
Overall, the Bay Area and other coastal markets outperformed inland markets. The industrial real estate markets in Southern California, Seattle, New York, and New Jersey all experienced double digit rent growth.
The entire U.S. outperformed the global average, which was six percent rent growth, a trend that has persisted over the past several years.
The Bay Area’s industrial real estate growth has come from technology and e-commerce companies that are bullish on the opportunities presented by the Bay Area, despite political and economic uncertainties. With strong demand from large tenants such as Amazon and Facebook, developers are working on building new industrial projects to meet demand.
Kevin Hatcher, senior vice president for the brokerage firm CBRE, commented on the growth: “Everyone’s looking at each other and asking, ‘Is this the new normal?’ The demand isn’t going away, we’re just having trouble keeping up with it.”
Demand for East Bay Warehouse Space
Skyrocketing demand in the East Bay has been driving much of the growth in the Bay Area. According to Hatcher, industrial space is especially in-demand by e-commerce companies, such as consumer home furnishing businesses, which need warehouses nearby to serve the local high-income and highly educated urban population. This makes Oakland the “eye of the storm” for industrial real estate, said Hatcher.
Oakland had just a 1.5 percent vacancy rate in the fourth quarter of 2018, according to CBRE. And the city’s industrial rents hit $11.04 per square foot in the fourth quarter, which was up from $9.96 per square foot in Q2.
In addition, new mass-scale developments are in the works in San Leandro and Richmond. More than 500,000 feet of new industrial space was created in San Leandro alone last year.
In 2018, Facebook leased more than 450,000 square feet of industrial space in Newark. Meanwhile, General Electric is making efforts to develop its long-defunct site at 5441 International Blvd. in spite of its history of toxic contamination.
In 2019, it’s expected that rents in the Bay Area will continue to rise, but at a slightly slower pace. Markets that present the best investment opportunities are those that have low supply and limited geographical area. The Bay Area presents these opportunities. Demand is high, but there are few untapped lots. Many developers are resorting to tearing down existing structures and building new industrial space.
Real estate investors should expect the nationwide trend of low vacancies to continue, along with rising replacement costs. Additionally, Bay Area investors should keep in mind that development here takes longer due to construction costs, site availability, and negotiations with local communities who are very engaged in the process.
“It’s not for the faint of heart,” Hatcher said. “It takes longer to appease all the stakeholders.”
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