MARKET DRIVERS
Since the last quarter, availability rates remained at 5.5% for industrial
space, while warehouse rose 50 basis points (bps) to 8.3%. Direct vacancy rates for both properties grew since last quarter. Industrial reached 4.7%, a 40 bps change, and warehouse had a 10-bps increase to 4.3%. For industrial, this is the highest recorded since 2011. Warehouse is still below the 6.0% high recorded in 3Q21. Direct asking rates for industrial properties are down 1.0% since 3Q24, reaching $1.96. Despite the drop, this rate is still significantly higher than the 5-year average of $1.67. Warehouse properties are up 2.6% in the same time frame, reaching $1.59, a tad lower than last quarter’s record high.
For industrial, leasing activity is up 80.9% compared to last year’s cumulative activity to this point. Warehouse activity is also 16.2% higher than it was at this point in 2024, due in part to this quarter’s 894.1K SF of activity, the highest recorded since 2Q23.
Although industrial sales are 54.7% lower than they were at this time last year, warehouse sales have picked up the slack. On the year, warehouse sales are 149.0% higher than it was last year. This increase in sales is a great sign of demand for this market.
Industrial’s net absorption was negative this quarter but remains positive to this point of the year. Warehouse on the other hand has had four straight negative quarters and is looking to rebound and finish positive for the first time since 2022.
Economic Overview
California’s unemployment increased 20 bps to 5.5%, while Santa Clara County increased 80 bps to 4.7% between May and August.
The manufacturing jobs and the trade, transportation, and utilities job sectors in the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) have shown modest decline over the year. The manufacturing sector reported 122.3K jobs, adding 600 jobs since last quarter, but a 3.0% decrease since 3Q24. The trade, transportation, and utility sector recorded 116.0K jobs, 700 jobs less than this time last year and just 100 shy of last quart’s figures.
NEAR-TERM OUTLOOK
Silicon Valley’s industrial market remained resilient through the third quarter of 2025, with new construction and policy-driven optimism counterbalancing lingering economic uncertainty.
Market fundamentals showed steady performance as vacancy increased modestly to 6.2%, up from 5.5% in Q2, while average asking rents held firm at $1.59 PSF NNN. The overall inventory stands at 65.3M SF, with 635,000 SF currently under construction—a restrained pace that reflects both measured developer confidence and elevated financing costs.
One of the few ground-up developments to break ground this quarter was the Campus at Bayside in Fremont, a six-building, 473,000 SF industrial project by 9th Street Partners and Clarion Partners. The development, located within Bayside Technology Park, marks a notable milestone as the only new commercial construction start in Silicon Valley this quarter. With flexible building sizes and robust power capacity, the project targets tenants in AI, advanced manufacturing, new energy, and automotive sectors. City officials noted that Fremont continues to lead in AI server manufacturing, underscoring the region’s emergence as a hub for technology-driven industrial demand.
Broader construction sentiment has been shaped by federal policy developments. According to DPR Construction’s latest Market Conditions Report, the recently passed One Big Beautiful Bill Act is expected to boost commercial and industrial project starts by making permanent the 100% depreciation allowance for buildings and equipment. While this measure could help restart stalled projects, industry leaders cautioned that labor shortages, tariffs, and rising material costs—particularly in steel, copper, and aluminum—remain key headwinds.
Meanwhile, corporate realignment continues to influence occupancy trends. QuantumScape, a San Jose-based battery manufacturer, announced an early termination of its lease at 1750 Automation Parkway, signaling a shift toward a leaner, capital-light operating model.
Despite mixed signals, sentiment across the industrial sector remains cautiously optimistic. Developers and tenants alike are adapting to changing economic conditions, while policy incentives and AI-related demand provide a foundation for gradual growth heading into 2026.
3Q 2025 Silicon Valley Industrial Market: Key Data Points
Explore our full Silicon Valley industrial market review for deeper insights into leasing trends, sale activity, and submarket performance.
- Vacancy Rate Rises: Industrial vacancy increased to 4.7% in Q3 2025, the highest since 2011, up 200 bps year-over-year.
- Warehouse Leasing Hits High: Warehouse leasing activity reached 894K SF in Q3, the highest since Q2 2023.
- Asking Rents Hold Steady: Average industrial asking rent was $1.96 PSF, down just 1.0% year-over-year.
- Warehouse Sales Surge: Warehouse sales volume rose 149% year-over-year, totaling 723K SF YTD.
- Net Absorption Turns Negative: Industrial net absorption was -165K SF in Q3, though YTD remains positive.
- Limited New Construction: Only one new industrial project broke ground in Q3, reflecting cautious developer sentiment.
Click here to subscribe to Kidder Mathews market research.