By Molly Herrick, Research Market Director, East Bay
Development Pipeline Continues to Surge
Job growth in the Bay Area has begun to flatten out relative to the enormous growth over the past several years. However, employment is presently at a historical high, and unemployment stands at a scant 3.9%. The East Bay region, which is comprised of Alameda and Contra Costa counties, posted healthy improvements to its unemployment rates over the past year, ending February 2016 at 4.3% and 4.5%, respectively.
The Labor Force & Housing
The labor force has ballooned in recent years with both in-migration to the Bay Area region in general, and migration of Bay Area residents to the East Bay. The East Bay has become an increasingly popular option for residents from other Bay Area cities thanks to its relatively lower home prices. We anticipate that these migration trends will persist as a lack of housing options and high housing costs continue throughout the Bay Area.
Industrial Market Vacancy
Vacancy in the I-80/I-880 Corridor industrial market closed the first quarter of 2016 at 2.1% overall, edging up over the last three months from the 1.9% rate that was in place at the end of 2015. However, this metric has remained below the 5.0% mark for eight consecutive quarters. The uptick in vacancy equated to 207,000 square feet (sf) of net occupancy loss. The loss occurred in the warehouse sector as a handful of sublease space came onto the market during the quarter. Conversely, direct warehouse occupancy increased in this time period by nearly 250,000 sf. Net absorption for manufacturing product was nearly flat at less than 5,000 sf.
Negative absorption figures brought on by the increase in sublease space are often cause to cast a wary eye. For the present, however, it is important to note that sublease vacancy is still notably lower than the historical average by approximately 35.7%.
In some cases we are even seeing landlords recapture below market space. Deal velocity continues to be impacted by the lack of available space in the market. Despite the uptick in sublease space, overall market fundamentals remain strong, and demand for top quality, large blocks of space continue to outpace supply. In fact, there are presently only four spaces over 100,000 sf available in existing product, and we are presently tracking 14 tenant requirements in that size range. In all size ranges, we are tracking total market demand at over 4.0 million square feet (msf) with only 3.4 msf available in existing inventory.
Over the next several months, we anticipate vacancy will plod along near its present low levels with absorption occurring primarily in new product, as there is not a significant amount of existing product left to absorb.
Rental rates continue to surge in the face of extreme and persistent supply constraints with the overall figure ending the first quarter of 2016 at $0.67 per square foot per month (psf/mo) on a triple net basis, up 7.9% over the course of just three months compared to $0.62 psf/mo at year-end 2015.
Rents have increased tremendously over the past several years from their trough of $0.38 psf/mo at the midpoint of 2011. Individually, both warehouse and manufacturing rents have grown considerably this year to $0.59 and $0.76 psf/mo, respectively, from $0.55 and $0.69 psf/mo. We anticipate rental rates will continue to climb as the supply of available space remains scarce throughout the market.
The development story remains the highlight of the I-80/I-880 industrial market this cycle. The market has added over 3.4 msf of new warehouse product to date. There is currently almost 1.7 msf of speculative industrial product under construction throughout the corridor slated for delivery in the second half of 2016. In addition, several other planned projects will likely begin construction later this year.
Development activity continues to be chiefly for warehouse product. Overton Moore’s 143,000 sf project on Eureka Drive in Newark is the only manufacturing project to go forward this cycle. We anticipate that new projects will continue to lease as they near completion or lease quickly upon completion and additional projects will likely fill the pipeline over the next several months. For the foreseeable future, we continue to expect any large blocks of top quality space to lease
Molly Herrick is the Research Market Director, East Bay for Cushman & Wakefield. Based in Oakland, CA, Molly has nearly ten years of experience working in a variety of research related positions within the commercial real estate niche. Previously with real estate firms DTZ and Colliers International, her resume includes extensive work as a research analyst and economic data interpretation. Molly earned her Bachelor of Arts Degree from Hampshire College in Amherst, Massachusets.