MARKET DRIVERS
Availability for both industrial, 4.5% to 4.9%, and warehouse, 5.3% to 6.0%, spaces edged slightly higher compared to the previous quarter.
The vacancy rate for Industrial properties grew 10 basis points (bps) to 2.8%. Conversely, warehouse went down 30-bps to 3.5% over that time frame. Availability outpacing vacancy for both property types indicates that landlords are bringing spaces to market even though they still have active tenants.
Asking rates decreased for industrial properties while warehouse properties increased, reaching $1.99/SF NNN and $1.55/SF NNN respectively. Industrial rates saw a small dip from the previous quarter’s all time high of $2.04, but overall, rents are indicating that there is healthy demand in this market.
Despite the uptick in rental rates, leasing activity has been tough for both industrial and warehouse properties this year. Though there was a rise from activity compared to last quarter, industrial leases did not reach last year’s volume and cumulatively there has been a 44.6% decline in activity. In a similar light, warehouse leases did not reach the previous quarter or year’s volume and is down 31.9% cumulatively.
Sales volume for both industrial and warehouse properties saw a rebound after a tough Q2 2024. Industrial sales grew from 44.9k SF to 157.3K SF, while warehouse sales increased from 33.7K SF to 90.1K SF.
Although industrial sales have outpaced the numbers recorded last year, the higher interest rates have taken a toll on warehouse sales which are down 69.3% when compared to cumulative transactions last year.
Both industrial and warehouse sectors saw an in net absorption year-over-year, quarter-over-quarter, and cumulatively compared to last year. Industrial net absorption increased to 373.4K SF in Q3 2024, which is higher than the leased space due to a owner-user delivery at 2590 Walsh Ave in Santa Clara netting 469.5K SF. The downturn in leasing activity paired with positive movements in net absorption highlight the reluctance of tenants to vacate and move to smaller spaces, a trend all too common in the office market.
ECONOMIC OVERVIEW
Santa Clara County and California saw slight rises in their unemployment rates. Santa Clara County’s rate increased 60-bps to 4.4% in Q3 2024, and California’s was up 10-bps to 5.3%.
The San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) industrial jobs saw some positive and negative movement quarter-over-quarter and year-over-year. The manufacturing sector reported 174.0K jobs, marking a 0.3% increase from 173.5K in 2Q24, and a 3.4% decrease since 3Q23. Within the Transportation and Warehouse sector, there were a total of 121.4K jobs in 3Q24, representing a 0.3% increase compared to last quarter and last year’s figures.
NEAR-TERM OUTLOOK
For the first time since March of 2020, the Federal Reserve has cut rates, with expectations that there are more cuts on the way as inflation has started to normalize. What this means for the industrial market is that capital markets will be incentivized to increase investments in properties at more competitive rates. It also allows for long term investments to meet short term liabilities, lessening the distressed asset markets. Property sales in the industrial market have slowed in recent years, and these cuts should breathe new life to this area. Additionally, there is still demand for spaces, as highlighted by vacancy and availability rates remaining competitive even in a down market. With further investments into companies being made possible, it is likely that the lease market could become even more competitive.
With vacancy and availability being so low, construction projects are vital for the health of the Silicon Valley industrial market. Though there aren’t many small spaces under construction, there are noteworthy large projects aimed at bringing in advanced manufacturing jobs to the area. One such project is the 267,000 SF project on Milmont Drive, located in the heat of Fremont’s Advanced Manufacturing Row. Expected to be completed in early 2025, the developers are expecting the project to house a tenant focused on advancing Silicon Valley’s status as a top tech hub. Once a tenant is found and this project is completed it will further solidify Fremont as a desirable industrial hub of the Silicon Valley.
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