MARKET DRIVERS
Since the last quarter, availability rates rose 50 basis points (bps) to 5.2% for industrial spaces, and 70-bps for warehouse which reached 7.4%.
Direct vacancy rate for both properties grew since last quarter as well. Industrial by 10-bps, and warehouse by 30-bps. Outside of a few outlier quarters, this has been the general trend since 2022 for these markets, and neither of which have reached their post pandemic highs. Direct asking rates increased for both property types over the course of the year, industrial is up 7.4%, and warehouse is up 10.4% in that time frame. Industrial is $.02 from it’s all time high recorded two quarters
ago, and warehouse has remained at it’s all time high recorded last quarter, indicating that the two property types have healthy demand and strong staying power despite availability and vacancy increases.
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 proper ties
were poor this quarter, resulting in the lowest recorded yearly figures recorded in over a decade for each property type.
There has yet to be a bump in investments that were hoped for from the lower interest rates, but more cuts and a new administration are on the way, which should lead volume to pick up in the next year.
Both industrial and warehouse sectors experienced negative net absorption this past quarter. Industrial was measured at -39.1k SF but ended the year with 224.2k SF in net absorption. In 2024, warehouse also had a positive net absorption until this past quarter’s -205.0k SF swung the figure to -127.8k SF.
ECONOMIC OVERVIEW
Santa Clara County outpaced California in terms of unemployment rate. Santa Clara County’s rate fell 50-bps to 4.0% while California’s rose10-bps to 5.4% over the past quarter.
The San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) has been on a downward trend for manufacturing jobs, but positive for the trade, transportation, and utilities. The manufacturing sector reported 173.1k jobs, marking a 3.0% decrease since 4Q23 and a 0.5% dip since last quarter. Conversely, the trade, transportation, and utilities sector reached 124.8k jobs, 2.9% higher than last quarter and 1.6% higher than last year.
NEAR-TERM OUTLOOK
After three rate cuts in 2024, the fed expected two further rate cuts this year, which is sure to shakeup the Silicon Valley industrial market. Rate cuts could rejuvenate the industrial market by encouraging investments at more competitive rates and supporting long-term assets to cover short-term liabilities, easing distressed markets. Although property sales have slowed this year, demand remains steady, as shown by competitive vacancy and availability rates. Increased funding for companies could also drive greater competition in the leasing market.
The other big news from 2024 is the election, with the incoming administration proposing increased tariffs and a decrease in immigration. If put into place, these policies would greatly increase construction costs, which will slow the new delivery pipeline and limit the supply of prime spaces. In the short term, warehouse space could see an increase in demand as companies elect to purchase natural goods and hold on to them to save on the future costs to import after tariffs take place. Nothing is set in stone, and the fear of the unknown may lead the market players to take a “wait and see” approach for the start of 2025. If these policies go into place, however, it is likely that the increased demand and limit in supply will lead to higher prices across the marketplace.
A recent study by CompStak found that more than 27% of nationwide industrial leases are set to expire within the next 2 years. It also determined that the rates of these leases are 75.7% lower than the current market rate. A trend that used to be exclusive to office tenants is beginning to creep into the industrial market as well, called “flight-to-quality” where tenants have opted to move to newer and nicer space and being prudent with the size of space they need. This can be seen in the Silicon Valley market, where asking rents increased despite vacancy and availability rising. Prospective tenants are about to be hit with unexpected increases in their lease rates and may search for higher quality product to move to. Although construction costs are set to rise, companies like Overton Moore Properties, who purchased a 130,752-square-foot San Jose flex building, believe that their investment and redevelopment to industrial will lead to attracting quality tenants at a rate high enough to validate their purchase.
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