San Francisco Industrial Market

San Francisco’s Vacancy Decreases to 3.0%
Net Absorption Positive 88,499 SF in the Quarter

The San Francisco Industrial market ended the second quarter 2018 with a vacancy rate of 3.0%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 88,499 square feet in the second quarter. Vacant sublease space decreased in the quarter, end-ing the quarter at 158,468 square feet. Rental rates ended the second quarter at $26.66, an increase over the previous quarter. There was 1,402,190 square feet still under construction at the end of the quarter.

Absorption

Net absorption for the overall San Francisco Industrial market was positive 88,499 square feet in the second quarter 2018. That compares to negative (53,438) square feet in the first quarter 2018, positive 749,096 square feet in the fourth quarter 2017, and positive 336,083 square feet in the third quarter 2017.

Tenants moving out of large blocks of space in 2018 include: See’s Candies Chocolate Shop moving out of (71,207) square feet at 430 Valley Dr, Classic Party Rentals moving out of (70,700) square feet at 1625-1635 Rollins Rd, and Impossible Foods, Inc. moving out of (60,841) square feet at 400 Saginaw
Dr.

Tenants moving into large blocks of space in 2018 include: Illumina, Inc moving into 360,000 square feet in three buildings located at 200 Lincoln Centre Dr, GM Cruise moving into 139,741 square feet at 1201 Bryant St, and Otto moving into 126,594 square feet at Pier 70.

The Flex building market recorded net absorption of positive 82,099 square feet in the second quarter 2018, compared to positive 4,622 square feet in the first quarter 2018, positive 376,295 in the fourth quarter 2017, and positive 122,561 in the third quarter 2017.

The Warehouse building market recorded net absorption of positive 6,400 square feet in the second quarter 2018 compared to negative (58,060) square feet in the first quarter 2018, positive 372,801 in the fourth quarter 2017, and positive 213,522 in the third quarter 2017.

Vacancy

The Industrial vacancy rate in the San Francisco market area decreased to 3.0% at the end of the second quarter 2018. The vacancy rate was 3.2% at the end of the first quarter 2018, 2.8% at the end of the fourth quarter 2017, and 3.3% at the end of the third quarter 2017.

Flex projects reported a vacancy rate of 5.9% at the end of the second quarter 2018, 6.7% at the end of the first quarter 2018, 5.5% at the end of the fourth quarter 2017, and 6.0% at the end of the third quarter 2017.

Warehouse projects reported a vacancy rate remained at 1.9% at the end of the second quarter 2018 compared to the previous quarter, 1.8% at the end of the fourth quarter 2017, and 2.4% at the end of the third quarter 2017.

Largest Lease Signings

The largest lease signings occurring in 2018 included: the 148,020-square-foot lease signed by Denali Therapeutics, Inc. at The Cove – Building 5 in the San Mateo North County market; the 76,375-square-foot deal signed by DHL Express at 99 S Hill Dr in the San Mateo North County market; and the 56,500-square-foot lease signed by DHL Express at 401 – 435 23rd Street in the SF Southeast market.

Sublease Vacancy

The amount of vacant sublease space in the San Francisco market decreased to 158,468 square feet by the end of the second quarter 2018, from 180,614 square feet at the end of the first quarter 2018. There was 270,125 square feet vacant at the end of the fourth quarter 2017 and 198,565 square feet at the end of the third quarter 2017.

San Francisco’s Flex projects reported vacant sublease space of 75,779 square feet at the end of second quarter 2018, down from the 110,895 square feet reported at the end of the first quarter 2018. There were 128,661 square feet of sublease space vacant at the end of the fourth quarter 2017, and 107,336 square feet at the end of the third quarter 2017.

Warehouse projects reported increased vacant sublease space from the first quarter 2018 to the second quarter 2018. Sublease vacancy went from 69,719 square feet to 82,689 square feet during that time. There was 141,464 square feet at the end of the fourth quarter 2017, and 91,229 square feet at the end of the third quarter 2017.

Rental Rates

The average quoted asking rental rate for available Industrial space was $26.66 per square foot per year at the end of the second quarter 2018 in the San Francisco market area. This represented a 9.3% increase in quoted rental rates from the end of the first quarter 2018, when rents were reported at
$24.40 per square foot.

The average quoted rate within the Flex sector was $41.01 per square foot at the end of the second quarter 2018, while Warehouse rates stood at $21.06. At the end of the first quarter 2018, Flex rates were $37.55 per square foot, and Warehouse rates were $19.81.

Deliveries and Construction

During the second quarter 2018, no new space was completed in the San Francisco market area. This compares to three buildings totaling 360,000 square feet that were completed in the first quarter 2018, two buildings totaling 278,466 square feet completed in the fourth quarter 2017, and 50,000 square feet in one building completed in the third quarter 2017.

There were 1,402,190 square feet of Industrial space under construction at the end of the second quarter 2018. Some of the notable 2018 deliveries include were three buildings located at 200 Lincoln Centre Dr and are now 100% occupied by Illumina, Inc.

The largest projects underway at the end of second quarter 2018 were 1000 Gateway Blvd, a 512,000-square-foot building with 0% of its space pre-leased, and 480 16th St, a 340,000-square-foot facility that is 99% pre-leased.

Inventory

Total Industrial inventory in the San Francisco market area amounted to 93,659,360 square feet in 4,778 buildings as of the end of the second quarter 2018. The Flex sector consisted of 25,116,501 square feet in 837 projects. The Warehouse sector consisted of 68,542,859 square feet in 3,941 buildings. Within the Industrial market there were 511 owner-occupied buildings accounting for 12,403,646 square feet of Industrial space.

Sales Activity

Tallying industrial building sales of 15,000 square feet or larger, San Francisco industrial sales figures rose during the first quarter 2018 in terms of dollar volume compared to the fourth quarter of 2017.

In the first quarter, eight industrial transactions closed with a total volume of $225,150,000. The eight buildings totaled 758,562 square feet and the average price per square foot equated to $296.81 per square foot. That compares to 10 transactions totaling $155,984,000 in the fourth quarter. The total square footage was 719,705 for an average price per square foot of $216.73.

Total year-to-date industrial building sales activity in 2018 is up compared to the previous year. In the first three months of 2018, the market saw eight industrial sales transactions with a total volume of $225,150,000. The price per square foot has averaged $296.81 this year. In the first three months of 2017, the market posted four transactions with a total volume of
$126,150,000. The price per square foot averaged $528.33.

Cap rates have been lower in 2018, averaging 5.47%, compared to the first three months of last year when they averaged 5.70%. One of the largest transactions that has occurred within the last four quarters in the San Francisco market is the sale of The Lion Building located at 2525-2545 16th St in San Francisco. This 149,033-square-foot industrial building sold for $67,250,000, or $451.24 per square foot. The property sold on 3/14/2018.