By Steve Kapp, Executive Managing Director, Newmark
Strong tenant demand, coupled with a limited supply of Class A industrial product, has pushed industrial rents in the San Francisco East Bay industrial market to new highs. Also known as the I-880 corridor, vacancy rates stood at 6 percent, down slightly from a year ago on a building base of 189 million square feet. Some submarkets like Fremont and Union City, as well as certain building types like new construction Class A warehouse, have performed even better than average. Warehouse rental rates now average above $1 per square foot, per month, in most East Bay markets. These show no signs of slowing down based on strong tenant demand. This demand goes beyond the typical ecommerce giants. Large lease deals were signed by Wine.com, Applied Materials, Home Depot and Chef’s Warehouse in the second quarter alone.
Another trend is the rise of the life sciences sector. These firms have traditionally gravitated to research-oriented campuses in South San Francisco, Emeryville or Palo Alto. However, the I-880 corridor is chalking up a number of deals for pilot plants and good manufacturing practices (GMP) facilities. Sana Bio recently leased a 164,000-square-foot advanced manufacturing facility in Fremont, while Senti Bio leased a 90,000-square-foot facility in Alameda. This is creating new demand for industrial facilities that was not previously seen. Rental rates vary greatly, depending on the tenant improvement allowance provided by the landlord. It is not uncommon for these tenant improvement allowances to exceed $200 per square foot, while rental rates push past $4 per square foot, per month.
Steve Kapp, Executive Managing Director, Newmark
Besides traditional warehouse users, the I-880 corridor has become very attractive to technology companies, also known as advanced manufacturing users. These sub-sectors include energy companies (better batteries), sensors, automotive technology (self-driving cars), and materials companies that are modifying the chemical composition of metals, plastics and other substances to create new materials. Examples of this in the I-880 corridor include Lucid Motors, Zymergen and UCT. Rental rates for these deals range from $1.20 per square foot (triple net) up to $2 per square foot.
The capital markets side has been extremely active as well with buyers seeking to tie up quality industrial assets for life sciences conversion plays. The value of these assets has increased by 25 percent or more over the past 12 months. Examples include Mount Eden Business Park in Hayward (369,000 square feet), Crossroads Technology Park in Union City (322,000 square feet) and Ardenwood Corporate Center in Fremont (307,000 square feet). The jury is still out on the success of these conversion projects but the prospects look promising.