State of the Industrial Real Estate Marketplace in Northern California

by Jeff Shaw

— By Edward F. Del Beccaro, Executive Vice President, TRI Commercial —

The major Northern California industrial markets contain a total of more than 860 million square feet of industrial buildings. The San Francisco Bay Area, North Bay, Silicon Valley, Sacramento and Central Valley have all experienced a falloff in tenant demand from 2021 to 2022 pandemic highs. Most markets experienced negative absorption in fourth-quarter 2023, including sublease space coming on the market that resulted in rents either plateauing or decreasing. 

Nevertheless, the outlook is still positive based on the various economic drivers pushing the market. For instance, manufacturers are benefitting from onshoring, with a projected 40 percent reduction in sourced material from China, per a recent report from Alix Partners. In addition, declining interest rates and continuing inflation will cause institutional money to flow into the industrial sector versus the office sector, according to a March 2024 ProLogis report.

Below are various industrial submarket reviews:

In the Oakland/East Bay Industrial I-80/880 Corridor, year-end 2023 experienced a slowdown in demand due to new construction and existing space becoming available. More than 10.2 million square feet is available, reflecting negative absorption of more than 778,000 square feet last year. The Port of Oakland container volume was down a significant 10.1 percent in 2023 compared to 2022. Oakland saw its vacancy rate for both direct and sublease space increase to 7.5 percent, while Fremont was at 4.2 percent and Richmond logged 5.5 percent.

Average asking rental rates in I-80/880 Corridor were $1.15 per square foot (gross). 

Overall, the East Bay industrial market clocked in at 6 percent vacancy at year-end 2023, with negative absorption of more than 1 million vacant square feet coming back on the market. R&D/flex space in this same region (as opposed to warehouse space) was the significant contributor to this vacancy increase.

ProLogis has proposed a new 430,000-square-foot warehouse on 29 acres at 3600 Alameda Ave. near the Port of Oakland. It acquired the 29-acre site after purchasing Duke Realty in 2022. 

Major East Bay deals include syrup maker Torani leasing 202,000 square feet in San Leandro, which is home to more than 500 food and beverage companies. This sector is expected to increase, including cold storage facilities at the Port of Oakland, housing exports from Central Valley, and imports from Asia and South America. Refrigerated export trade of 20-foot containers was $7.1 billion in 2023, ranking it first among U.S. ports, according to the Port of Oakland. 

A contrary trend affecting the ports of Oakland and Long Beach are the California EV truck mandates that all new trucks must meet this year. The charging time may add 10 to 15 hours a week to truck delivery times, per the Wall Street Journal. Large batteries displace truck load carrying capacity, and the lack of large truck EV charging stations compounds the problem. Logistics providers will pass the increased shipping costs onto consumers when possible. 

Small warehouse space remains at a premium, especially for construction trade supply chains. CoStar reports East Bay Oakland is ranked 32nd in the country with a vacancy rate of 4.9 percent as of this past March. Small spaces below 10,000 square feet are staying on the market less than 3.4 months. Sacramento is ranked 34th nationwide with a 4.5 percent vacancy rate and spaces remaining vacant only three months prior to being leased.

Silicon Valley in the San Jose/Sunnyvale/Gilroy area also experienced a cooling in demand for industrial warehouse/flex space. More than 1.1 million square feet of new space is being delivered in 2024, with more than 20 percent of that space still available for lease. Almost half of the vacancy in Silicon Valley flex space was built prior to 1990, reflecting future-forward needs of laboratories and advanced manufacturing users.

Flex sales in Santa Clara County decreased from $1.4 billion in 2022 to $277 million in 2023, and warehouse sales in Santa Clara County decreased from $678 million in 2022 to $338 million in 2023.

Central Valley saw its industrial vacancy rate increase to 8.4 percent. Like other Northern California areas, some projects were placed on hold due to relatively high interest rates and persistent inflation.

Central Valley is home to many of the warehouse fulfillment centers that serve the inner San Francisco Bay area. It also is a major source of construction materials and exported farm crops through the Port of Oakland.

The vacancy rate in Tracy is 5 percent, 9.3 percent in Stockton and 6.7 percent in Lathrop. San Joaquin County saw an increase to 7.2 percent vacancy, per CoStar.

Major leases included Macy’s 273,000-square-foot space in Lathrop. while LECANGES, a transportation company, leased 167,000 square feet in Tracy.

The North Bay of Solano and Napa counties also saw major decreases in industrial demand for all product types coming in at more than 3 million square feet of vacancies. Vacant space increased in both major industrial markets of Benicia and Fairfield. Major leases included Amazon leasing 1.2 million square feet in Vacaville, while Fitness Super Store leased two separate buildings for a total of 74,000 square feet. 

There is optimism in the Central Valley and North Bay industrial markets as more of the warehouse product relocates from the inner San Francisco Bay Area due to cost of land and migrating work force. Advanced manufacturing and life sciences uses are replacing traditional underutilized warehouse properties. 

Similarly, in Sacramento County, industrial demand slowed in fourth-quarter 2023 with negative 61,000 square feet of absorption.  Sublease space now totals 335,859 square feet, which represents 4 percent of vacant space, per CoStar.

Although the industrial market cooled in 2023, expect this sector to continue to grow in future years due to favorable trends. This includes the industrial rental rates’ strength compared to office and retail rents. This has led to conversions of one- and two-story buildings to industrial. Look for drone delivery of freight to impact Northern California in the next few years. They’re already being used by Walmart in Texas and other states, and by CVS in several Southeast states. Additionally, look for dated obsolescent industrial buildings to be torn down in the inner San Francisco Bay Area and replaced by life sciences uses.

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