MARKET DRIVERS
The industrial space availability rate showed stability at 3.4% on a quarter-over-quarter basis. In contrast, the availability rate for warehouse space saw a slight increase from 4.1% in 1Q23 to 4.2% in 2Q23.
The vacancy rate for industrial buildings saw a marginal rise from 1.5% in 1Q23 to 1.6% in 2Q23 quarter-over-quarter, while the vacancy rate for warehouse buildings exhibited a more significant increase from 2.5% in 1Q23 to 2.9% in 2Q23. The asking lease rates for industrial properties demonstrated both quarter-over-quarter and year-over-year growth, reaching $1.79/SF NNN in 2Q23 compared to $1.85/SF NNN in 1Q23 and $1.77/SF NNN in 2Q22. Similarly, the asking lease rates for warehouse properties also experienced an increase on both a quarter-over-quarter and
year-over-year basis, rising to $1.42/SF NNN in 2Q23 from $1.45/SF NNN in 1Q23 and $1.33/SF NNN in 2Q22.
In 2Q23, leasing activity for industrial buildings experienced a quarter-over- quarter decline, reaching 224.3k SF, which was lower than the 280.7k SF recorded in 1Q23. The year-over-year comparison showed an even more significant decrease, as leasing activity dropped from 614.4k SF in 2Q22. In contrast, leasing activity for warehouse buildings saw an increase from 273.4k SF in 1Q23 to 496.9k SF in 2Q23. However, this represented a decrease compared to 2Q22, when leasing activity reached 1.4M SF.
Industrial building’s total sales volume experienced a significant quarter-over-quarter decrease, declining from 1.5M SF in 1Q23 to 861.6k SF. On the other hand, sales volume for warehouse buildings increased from 53.9k SF in 1Q23 to 185.1k SF in 2Q23. Direct net absorption reduced both in the industrial and warehouse sectors where industrial direct net absorption fell from negative 15.2k SF in 1Q23 to negative 37k SF in 2Q23 and warehouse direct net absorption fell from negative 6.5k SF in the 1Q23 to negative 191.6k SF in 2Q23.
ECONOMIC REVIEW
The unemployment rate in Santa Clara County remained unchanged at 3.1%, suggesting stability in the region. On the other hand, there was a slight increase in California’s unemployment rate from 4.3% in the previous quarter to 4.5% in the current quarter.
In the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA), industrial jobs witnessed a year-over-year increase; however, there was a decline quarter-over-quarter. Within the Transportation and Warehouse sector, there was a total of 121.5k jobs in 2Q23 which was a 0.9% decrease compared to the previous quarter, but a 1% increase year-over-year. As for the Manufacturing sector, there was a total of 180.5k jobs which was a slight 0.1% decrease compared to 1Q23, but a notable 2.6% increase compared to 2Q22.
NEAR-TERM OUTLOOK
The commercial real estate lending sector has decelerated due to higher interest rates, the possibility of a recession, and recent regional bank collapses. Investors are scrutinizing lenders more closely, leading to adjusted pricing expectations and conservative debt terms. To fill the lending gaps, alternative capital sources, including life insurance companies, have emerged. Regional and community banks are expected to account for less than 30% of maturing commercial real estate debt, and lenders are focusing on deals, markets, and sectors projected to be more resilient during an economic downturn.
Tesla, a major employer in Fremont with around 22k employees, operates a large 5.5M SF factory in the city. Recently, Tesla acquired an additional manufacturing facility in Fremont to enhance its production of the innovative 4680 battery cell technology. Originally meant for Applied Materials, the facility’s plans were withdrawn, allowing Prologis, who acquired the building from Duke Realty last year, to lease it directly to Tesla.
Despite the competitive nature of the industrial market, warehouses have been seen on the sublease market increasingly as companies brace for an economic downturn. One instance is Rivian Automotive Inc., the Irvine-based electric car manufacturer, who placed 350k SF of sublease space on the market shortly after acquiring it, in line with their cash conservation focus this year.
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