|
7/07/15
|
Here’s a mid-year update on the San Francisco industrial market, provided to us by regional real estate services firm Kidder Mathews:
The San Francisco industrial market took a pause in the second quarter of 2015, with negative net absorption of 173k sf nearly canceling out the first quarter’s strong absorption. This increased vacancy to 3.7%. Asking rental rates jumped nearly $2.00 this quarter, to where they now sit at an average of $16.70 per year. The larger industrial leases remain in the San Mateo County submarket, where larger tenants are trading a decentralized location to find adequate square footage. In San Francisco this quarter, gross absorption and leasing activity both slowed. However, with new product coming to the market providing more space options for tenants, leasing activity could increase in the second half of the year.
Net absorption, a measure of market strength, was negative 173k sf in the second quarter of 2015, bringing YTD net absorption to 52k sf. Bay View/Hunters Point and Showplace Square were the only two submarkets with positive net absorption this quarter, with 13.1k sf and 56.6k sf, respectively. South of Market had its second straight quarter of negative absorption, with -34.7k sf for the year. Mission Bay/China Basin had the largest occupancy losses this quarter, with 100.1k sf of negative absorption.
Very little leasing activity occurred in the second quarter, with the 60.3k sf that did take place being roughly 90k sf below the post-recession average. The largest deal this quarter was a 20k sf lease at 1525 Cortland Ave in the Southern City submarket. The first quarter’s net absorption was a result of newly available space on the market, which was leased and occupied in the same quarter. We expect negative absorption in the second quarter to allow tenants to find space in this low-vacancy market, and move in by the end of the year. This should keep net absorption low, but overall positive, for the rest of 2015.
The San Francisco industrial market vacancy rate has increased slightly from 3.1% in the first quarter to 3.7% in second quarter. The submarkets of Southern City, Lower SoMa, Yerba Buena and Rincon/South Beach all have a vacancy rate of 0%. Of all submarkets in San Francisco, only Mission Bay/China Basin has vacancy over 5%.
The average asking rental rate in the first quarter was $16.70/sf/yr on a triple net basis, the highest rates since Kidder Mathews began tracking rates in 2002. As was the trend throughout 2014, many industrial spaces that are coming on to the market right now are unpriced, with landlords letting the market set the price. Because of this, the numbers, which come from a survey of landlord representatives, can be swayed drastically by a few low or high outliers. However, we feel that the asking rate for high quality industrial space in San Francisco is finally catching up to the market rate of around $16.00/sf/yr, NNN.
Sales Activity
The San Francisco industrial investment market remains relatively quiet. This is mostly due to the fact that much of the high quality industrial product that sellers were looking to move sold in 2012, before the increase in the capital gains tax went into effect in January 2013. Another driving factor in the market is that there is not much high quality industrial product left in San Francisco itself. Much of the industrial product that is being purchased is slated for demolition or refurbishing as creative office space.
Sales activity increased slightly, but continued the slow pace we saw throughout 2014 in San Francisco, with $82.1 mil in sales volume between six deals. This includes a mix of leased investments, residential redevelopment plays and owner/user buildings. Many of these properties were purchased for residential and office redevelopment, such as 1140 Folsom, a 14.6k sf industrial building, which will be torn down to make way for a 112-unit residential development 99 Rausch. Excluding outliers, the average sale price per square foot in the first quarter dropped slightly to $368, down $24 from last quarter.
|
|
Return to the Archive page
|
|
|
|
|