MARKET DRIVERS
Since the last quarter, availability rates rose 10 basis points (bps) to 5.3% for industrial space, while warehouse dropped 50 bps to 7.8%.
Direct vacancy rate for both properties grew since last quarter. Industrial reached 4.4%, a 20 bps change, and warehouse had a 10 bps increase to 4.4%. For industrial, this is the highest recorded since 2011. Warehouse is still below the 6.0% high recorded in 2Q21. Direct asking rates for industrial properties are down 5.4% since 2Q24, reaching $1.93. Despite the drop, this rate is still significantly higher than the 5-year average of $1.67. Warehouse is up 1.9% in the same
time frame, reaching $1.59, a tad lower than last quarter’s record high. Industrial leasing has remained consistent, matching last year’s pace year-to-date. In contrast, Warehouse activity is down 17.6% from this time in 2024, partly due to a 30.3% drop from last quarter.
Although industrial sales are 70.7% lower than they were at this time last year, warehouse demand has skyrocketed. This quarter alone has eclipsed the activity from the first half of 2024 altogether. This increase in sales is a great sign of demand, despite the lackluster leasing activity. Industrial saw negative net absorption this quarter but remains positive year-to-date. Meanwhile, Warehouse has posted three straight negative quarters and is aiming for a rebound.
Economic Overview
From January to April 2025, California’s unemployment rate edged down by 10 basis points to 5.3%, while Santa Clara County saw a steeper decline of 40 basis points, falling to 3.9%.
The San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) has been on a downward trend for manufacturing jobs and for the trade, transportation, and utilities. The manufacturing sector reported 121.6K jobs, marking a 0.5% dip since last quarter and a 2.6% decrease since 2Q24. The trade, transportation, and utilities sector recorded 116.0K jobs, 1.2% and 0.4% lower in the respective time frames.
NEAR-TERM OUTLOOK
The Silicon Valley industrial market is experiencing renewed momentum as both investors and occupiers respond to shifting macroeconomic forces. In Fremont, Prologis acquired the 177,000-square-foot warehouse at 5555 Auto Mall Parkway for $59 million, reinforcing confidence in core infill submarkets. The transaction comes as Prologis and other institutional players ramp up activity amid increased logistics demand driven by global supply chain disruption and rising tariffs.
Leasing fundamentals remain healthy. The recently completed 880 Technology Center reached full occupancy less than a year after delivery, with tenants in AI hardware and electric vehicle innovation. This success reflects the city’s strategic land-use flexibility, converting former retail sites into high-value industrial campuses. Nearby, BKM Capital Partners purchased the 165,000-square-foot Hanover Industrial Park with plans to reposition the partially leased asset. The firm also secured a $1.5 billion joint venture with Kayne Anderson to expand its footprint in light industrial across the Bay Area and beyond.
Strong tenant demand and AI-related growth continue to reshape the industrial landscape. Fremont is seeing robust activity from occupiers seeking heavy power, modern infrastructure, and access to Silicon Valley’s talent pool. Investors remain bullish on the long-term potential of this market, especially in submarkets with limited development pipelines and below-replacement-cost
acquisition opportunities.
Tariffs and construction costs remain headwinds. Steel and aluminum price hikes, compounded by evolving trade policy, have pushed developers to adopt new strategies, including bulk materials purchasing and tariff contingencies. General contractors are adjusting forecasts, with some materials seeing lower-than-expected cost increases while others remain volatile.
Prologis executives noted during their earnings call that global fragmentation is prompting occupiers to duplicate infrastructure across markets. As companies diversify supply chains and build regional redundancy, demand for warehouse space is increasing—a dynamic that played out in the UK post-Brexit and may now unfold across the U.S. Amid geopolitical risk, 3PLs are gaining popularity, offering flexibility in an unpredictable trade environment. Despite broader economic uncertainty, Silicon Valley’s industrial sector remains fundamentally strong, with institutional capital, tech-driven demand, and strategic land use continuing to shape its trajectory.
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