|This report provided by Cushman & Wakefield
ECONOMY: California Reopening Stumbles, Industrial Does Not
The East Bay, consisting of Alameda and Contra Costa counties, recorded positive job growth with 31,000 jobs added year-over-year (YOY), bringing regional employment to nearly 1.11 million. This translated to an unemployment rate of 5.8%, a decline of 210 basis points (bps) from the same period in 2020. Widespread vaccinations led to California reopening in June of 2021, with local governments easing shelter-in-place orders, mask mandates, and social distancing. However, a spike in cases late in the fourth quarter, driven by the new Omicron variant, has led to the reintroduction of mask mandates and additional safety measures across much of the country. In the East Bay, industrial property markets have been largely unaffected by the pandemic pressures that have weighed so heavily on the office and retail sectors. In fact, the market recorded its strongest year of leasing activity since 2016 with vacancy down and asking rates at a market high.
SUPPLY: Vacancy Hinges on New Construction
The vacancy rate in the East Bay Oakland industrial market was just 4.0% at the close of 2021, down 100 bps YOY despite over 2.4 msf of new construction, the majority of which delivered on a speculative basis. Vacancy for manufacturing space was a scant 3.2% in the fourth quarter as a lack of new inventory has placed significant downward pressure on vacancy. By comparison, the market for warehouse space is closer to reaching an equilibrium with vacancy for this product type level with the first quarter of 2021. Strong tenant demand is contending with a robust development pipeline, which has recorded minimal preleasing activity. 13.5% of vacant industrial space was accounted for in just two recently delivered properties. However, new construction does not sit vacant for long as tenants desire the elevated clear heights, high dock door ratio and well configured truck courts that can be hard to find in existing inventory. As the market for large block space fluctuated with new construction, availability in the smaller size ranges continued to tighten. The number of availabilities between 10k sf and 100k sf was down 45% from this time last year as a growing tenant base competed for space.
PRICING: Demand Drives Higher Rents
The average asking rate for East Bay industrial closed the fourth quarter at $1.06 per square foot (psf) on a monthly triple net basis, an increase of $0.07 psf from the prior quarter and $0.11 YOY. This significant jump in pricing can be attributed to several factors. The first is the rising proportion of new construction as a percentage of total vacancy. The Richmond submarket saw vacancy rise 280 bps and the asking rent jump to a market high of $1.14 psf with just shy of 700k sf of new construction delivered over the course of 2021. While new construction has pulled up rents, there has also been a sustained increase in pricing for existing inventory. Strong demand for traditional warehouse space has allowed landlords to push rates across the I-880 corridor with average asking rate up YOY for every submarket but Emeryville (which has the market’s smallest inventory). The submarkets of Newark and Fremont have recorded particularly steep increases in asking rents, closing the fourth quarter at $1.31 and $1.34 psf, respectively. These submarkets, given their proximity to both the East and South Bay, are increasingly popular for advanced manufacturing uses that have driven rental growth in that product type. Amidst strong tenant demand and a significant development pipeline, asking rates are expected to hold at market highs.
DEMAND: Despite Pandemic, Market Continues to Grow
The East Bay industrial market recorded its sixth consecutive quarter of positive net absorption, bringing total net absorption for 2021 to 4.2 msf, or 2.3% of total industrial inventory. This net absorption has been driven by strong leasing, with full year gross absorption totaling 12.4 msf, the highest level in five years. The fourth quarter was particularly strong with 12 leases inked for over 100k sf. Cushman & Wakefield was tracking over 5.7 msf of industrial requirements at the end of 2021, demand which is anticipated to keep absorption in the black moving into 2022.
CAPITAL MARKETS: East Bay Industrial Attracts Investors
Strong market fundamentals continue to draw significant investment in the region. Of note this quarter was Fortress Investment Group’s acquisition of 47550 Kato Road in Fremont. The 254.7k sf warehouse was purchased for $80 mil in a sale-leaseback from Homelegance Incorporated. Also of note was the sale of 41119 Boyce Road in Fremont, a 208.2k sf manufacturing facility purchased by CenterPoint for $86 mil. Excess land pushed the price on building square footage to $413. As developable land becomes increasingly scarce and rental rates continue to climb, heightened investment activity is expected to carry into 2022.
• Asking rents at the end of the first quarter were $1.06 psf, up $0.07 from the third quarter of 2021. Looking forward, rent growth will continue modestly, given strong demand and new construction.
• There is over 1.5 msf currently under construction, the majority of which is available. This pipeline could create temporary spikes in vacancy, but robust tenant requirements are expected to absorb the space as it delivers throughout 2022.
• The vacancy rate was 4.0% at the end of fourth quarter, having ticked down 20 bps from the third quarter, and down 100 bps from this time last year. Vacancy is expected to hold or decline modestly into 2022 as tenant demand contends with the delivery of new construction.
This report was prepared by Wescott Owen, Research Manager in C&W’s Oakland office
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