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The San Francisco Bay Area’s major warehouse/distribution and manufacturing hub can be found along the I-880 corridor in the East Bay. This region’s industrial market has enjoyed steady growth with both overall vacancy rates and asking rental rates improving by about 10 percent year-over-year. The overall vacancy rate in the first quarter of 2013 was 10.22 percent — a three-year low — while the asking rental rate was $7.44 per square foot, triple-net, annually.
Interestingly, the most significant growth this year came from the market’s largest segment: the warehouse sector. The warehouse market’s vacancy rate dropped by more than 25 percent year-over-year, to just 8.27 percent. In fact, the vacancy rates in all I-880 warehouse submarkets, aside from Newark, now sit at less than 10 percent. Asking rental rates in the warehouse market increased by nearly 8 percent to $4.80 per square foot, triple-net, annually. Several properties were listed during the second quarter of 2013 and therefore not included in these statistics.
However, these properties boast asking rates as high as $5.76. Cornish & Carey Commercial Newmark Knight Frank believes these latest trends indicate an imminent spike in asking rates in the warehouse market.
Third-party logistics providers, or 3PLs, are driving growth in the East Bay’s I-880 corridor warehouse market. The housing and new construction markets are also experiencing significant recoveries, which are driving additional growth. 3PLs continue to expand in this market, with Cal Cargo and Seko Logistics each leasing two additional locations. East Bay Logistics also leased an extra 215,000 square feet, while newcomers to the market, including Brown West Logistics and BeavEx, leased 86,000 square feet and 65,000 square feet, respectively.
The recovery of the East Bay’s housing industry precipitated the growth of companies supplying this sector. EB Bradley expanded into 78,000 square feet, Mohawk Carpets leased 70,000 square feet and Alameda Electric consolidated facilities into a larger property. For the first time in 13 years, developers have begun construction on warehouse projects speculatively along the I-880 corridor.
Developer Goodman Bircher is currently building a 375,000-square-foot property in Oakland, Conor ARA is slated to complete a 575,000-square-foot development in Newark in the fourth quarter of 2013, Overton Moore plans to construct a 700,000-square-foot complex in Fremont, and four other projects are currently in the planning stages in the cities of San Leandro, Union City, Fremont and Newark. Cornish & Carey Commercial Newmark Knight Frank anticipates that this new product will command rental rates as high as $6.25 per square foot, triple-net, annually and will lure companies to the East Bay from other markets like Stockton and Southern California.
Investment activity across all sectors in the East Bay’s I-880 corridor has been competitive. Several real estate investment firms pursued the few buildings offered for sale. DivcoWest purchased the 340,000-square-foot Mission West portfolio, DCT Industrial Trust acquired a 335,000-square-foot warehouse from Morgan Stanley, McLellan Estate Company purchased Northpoint Business Park from Seagate Coyne, LLC and Industrial Income Trust bought two properties, a 175,000-square-foot building from Prologis and a 100,000-square-foot warehouse from TA Associates. However, owner/user demand commanded top dollar in the first quarter of 2013 as Seagate Technologies purchased the infamous 410,000-square-foot Solyndra building. Other enterprises making significant investments in product that they plan to occupy include Gillig, Uni-Tile & Marble, Graybar Electric, Unigen, Well Luck, Nuts & Spice and Alco Iron.
Cornish & Carey Commercial Newmark Knight Frank predicts the East Bay market will continue to strengthen throughout 2013. As rental rates rise and available inventory shrinks, more tenants will be incentivized to renew leases early, or to blend and extend current leases. Well-capitalized tenants will increasingly seek to purchase their own buildings to minimize rental rate growth exposure as institutional owners push older inventory for sale to capitalize on tenant demand.
— Joe Fabian, managing director, Cornish & Carey Commercial Newmark Knight Frank in Hayward, Calif.