Category: San Francisco Industrial Real Estate Forecast 2016 (1)

Source: CoStar Year-End 2015 Industrial Report

The San Francisco Industrial market ended the fourth quarter 2015 with a vacancy rate of 3.2%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 383,017 square feet in the fourth quarter. Vacant sublease space decreased in the quarter, end- ing the quarter at 245,799 square feet. Rental rates ended the fourth quarter at $18.60, an increase over the previous quarter. There was 408,797 square feet still under construction at the end of the quarter.

Absorption

Net absorption for the overall San Francisco Industrial market was positive 383,017 square feet in the fourth quarter 2015. That compares to negative (537,118) square feet in the third quarter 2015, positive 51,907 square feet in the second quarter 2015, and negative (8,761) square feet in the first quarter 2015.

The Flex building market recorded net absorption of positive 124,445 square feet in the fourth quarter 2015, compared to positive 526 square feet in the third quarter 2015, positive 165,145 in the second quarter 2015, and positive 5,888 in the first quarter 2015.

The Warehouse building market recorded net absorption of positive 258,572 square feet in the fourth quarter 2015 com- pared to negative (537,644) square feet in the third quarter 2015, negative (113,238) in the second quarter 2015, and negative (14,649) in the first quarter 2015.

Vacancy

The Industrial vacancy rate in the San Francisco market area decreased to 3.2% at the end of the fourth quarter 2015. The vacancy rate was 3.6% at the end of the third quarter 2015, 3.3% at the end of the second quarter 2015, and 3.8% at the end of the first quarter 2015.

Flex projects reported a vacancy rate of 3.4% at the end of the fourth quarter 2015, 4.0% at the end of the third quarter 2015, 4.2% at the end of the second quarter 2015, and 5.4% at the end of the first quarter 2015.

Warehouse projects reported a vacancy rate of 3.1% at the end of the fourth quarter 2015, 3.5% at the end of third quarter 2015, 3.0% at the end of the second quarter 2015, and 3.3% at the end of the first quarter 2015.

Sublease Vacancy

The amount of vacant sublease space in the San Francisco market decreased to 245,799 square feet by the end of the fourth quarter 2015, from 337,620 square feet at the end of the third quarter 2015. There was 339,249 square feet vacant at the end of the second quarter 2015 and 333,754 square feet at the end of the first quarter 2015.

San Francisco’s Flex projects reported vacant sublease space of 54,864 square feet at the end of fourth quarter 2015, down from the 159,121 square feet reported at the end of the third quarter 2015. There were 164,850 square feet of sublease space vacant at the end of the second quarter 2015, and 186,108 square feet at the end of the first quarter 2015.

Warehouse projects reported increased vacant sublease space from the third quarter 2015 to the fourth quarter 2015. Sublease vacancy went from 178,499 square feet to 190,935 square feet during that time. There was 174,399 square feet at the end of the second quarter 2015, and 147,646 square feet at the end of the first quarter 2015.

Rental Rates

The average quoted asking rental rate for available Industrial space was $18.60 per square foot per year at the end of the fourth quarter 2015 in the San Francisco market area. This represented a 4.4% increase in quoted rental rates from the end of the third quarter 2015, when rents were reported at $17.82 per square foot.

The average quoted rate within the Flex sector was $30.14 per square foot at the end of the fourth quarter 2015, while Warehouse rates stood at $14.19. At the end of the third quarter 2015, Flex rates were $28.44 per square foot, and Warehouse rates were $13.71.

Deliveries and Construction

During the fourth quarter 2015, no new space was completed in the San Francisco market area. This compares to 0 buildings in the previous two quarters, and 118,080 square feet in three buildings completed in the first quarter 2015.

There were 408,797 square feet of Industrial space under construction at the end of the fourth quarter 2015. Some of the notable 2015 deliveries include: 901 Rankin St, an 82,480-square-foot facility that delivered in first quarter 2015 and is now 100% occupied, and 1 Kelly Ct, a 25,600- square-foot building that delivered in first quarter 2015 and is now 100% occupied.

The largest projects underway at the end of fourth quarter 2015 were The Cove Building 3, a 153,047-square-foot building with 50% of its space pre-leased, and The Cove Building 4, a 140,053-square-foot facility that is 0% pre-leased.

Sales Activity

Tallying industrial building sales of 15,000 square feet or larger, San Francisco industrial sales figures fell during the third quarter 2015 in terms of dollar volume compared to the second quarter of 2015.

In the third quarter, seven industrial transactions closed with a total volume of $51,564,100. The seven buildings totaled 289,631 square feet and the average price per square foot equated to $178.03 per square foot. That compares to 11 transactions totaling $88,245,000 in the second quarter. The total square footage was 423,420 for an average price per square foot of $208.41.

Total year-to-date industrial building sales activity in 2015 is down compared to the previous year. In the first nine months of 2015, the market saw 35 industrial sales transactions with a total volume of $320,599,100. The price per square foot has averaged $202.49 this year. In the first nine months of 2014, the market posted 40 transactions with a total volume of $365,813,100. The price per square foot averaged $214.70.

Cap rates have been lower in 2015, averaging 4.34%, compared to the first nine months of last year when they averaged 6.46%.

Link to full report: Q4 Costar