Industrial Users Scramble For Tight Space In NorCal

The Bay Area's space constraints continue to drive down vacancy for industrial and, in addition to traffic congestion at the Port of Oakland, could lead to more innovative designs such as building vertically. The sector seems poised to pick up where it left off in 2020 with continued strong demand generated largely by e-commerce and food-related businesses. The performance is noteworthy in Northern California, where office and multifamily have been dealt a severe blow by the coronavirus pandemic, particularly in the Bay Area. 

"Industrial has become a much more attractive asset type, the competition is going to be a lot fiercer but our appetite and the appetite of our peers continues to grow," CenterPoint Properties Senior Vice President William Lu said during the Bisnow Northern California Industrial in 2021 & Beyond webinar on Feb. 11.

The e-commerce trend has significantly amplified the boom for the Oakland/East Bay market that has historically thrived in proximity to both the Port of Oakland and a massive online shopping consumer base. Overall vacancy for the area was 3.7% in Q4 2020, with 486K SF of net absorption and 1.6M SF under construction, according to a report from Colliers International. Other primary California industrial markets also performed very well: Sacramento had 5.5% vacancy, 2M SF in net absorption and 3.8M SF under construction, according to Colliers, and San Joaquin County had 7.9% vacancy and net absorption of 1.7M SF. 

“We have had the benefits all along of being the gateway for so much traffic coming in from Asia and the rest of the world,” Allen Matkins Real Estate partner John Tipton said. “We have a growing economy, and then what has supercharged everything, even more than anything else, is during the pandemic you have this massive increase in online shopping.”

Tipton pointed to the recently released Allen Matkins/UCLA Commercial Real Estate Survey that found industrial developer sentiment to be optimistic for both Northern and Southern California over the next three years. Lease rate increases are expected to be above the inflation rate, and the currently single-digit vacancy rates could dip even lower. The view is mostly based on high hopes for the continued rise of e-commerce, the survey concluded, based on data from the U.S. Census Bureau that showed a sharp divide between overall retail sales between October and November that were down 1.1% and non-store retail that was up by 29%.

“I've been doing West Coast development for the past 15 years, and demand is the strongest I've ever seen it,” Lu said during the webinar.

Lu said that as industrial continues to become a more attractive asset type, the company’s goal is to continue to grow in the region. CenterPoint has construction projects underway in Alameda, San Joaquin and Contra Costa counties. Lu cited a 460K SF facility at the Port of Oakland as the company's West Coast flagship project — being close to the source where goods come in from Asia provides a significant benefit to tenants who are spared extra transport back and forth from the Central Valley. 

Realterm Vice President of Acquisitions Derek Fish said during the webinar that because 60% of his company’s portfolio relates to last-mile industrial product ranging from e-commerce fulfillment and parcel sortation to food and beverage delivery, business operations were able to increase during 2020. He expects new opportunities created by the pandemic could result in even more growth this year. 

“Our portfolio is centered around what we think are extremely functional assets and particularly infill locations, and those vacancy rates remain extremely low,” Fish said. “It’s often a shortlist of potential options for tenants or users in that space, so pricing power remains strong. Particularly in the western markets, you're seeing aggressive rent growth forecasts up and down the coasts, and that's going to be borne out for the most functional and best assets over time.”

In terms of design trends, PREMIER Design + Build Group Director of Project Development Alexis Graziosetta-Tobias said during the webinar that she has seen a shift toward more clear height in spaces and greater emphasis on sustainability, clean air and more tenant amenities. Whereas a landlord would seek a single tenant for a large building in the past, more are now looking for multiple tenants.

There is also rising demand for more flexible spaces that could appeal to a broader range of tenants. Conversions to cold storage have become common. 

“We're seeing more vertical construction where it's not just single-story,” Tipton said. “When you talk about last-mile, you're inherently talking more about the [central business district] areas because that's the whole point of being near where the people are, and that's where the real estate is more expensive and that's where you're starting to see more of the vertical development of industrial, but it's just in its infancy.”