WESTERN SNAPSHOT, APRIL 2007

East San Francisco Bay Industrial Market

The East Bay industrial corridor, also known as the Interstate 880 corridor, extends between Emeryville and Hayward, California, and incorporates more than 150 million square feet of industrial and R&D space. Within the corridor, the high demand for warehouse and distribution space is being adversely impacted by the lack of land for new development, especially in the areas near the Port of Oakland. Lease rates on warehouse space are anticipated to increase about 10 percent by the end of 2007. Industrial condominiums and R&D space are facing the opposite situation with an oversupply of product and substantially lower sale and lease rates in most areas.

The tightest submarkets are San Leandro and South Oakland where vacancy rates for warehouse and distribution space are at 5-year lows of 4 to 6 percent. Conversely, both Fremont and Hayward have been negatively impacted by the oversupply of R&D space and industrial condos with vacancy rates at 20 and 50 percent, respectively. Many of the speculative condos built between 2004 and mid-2006 remain empty. The lease rates for R&D space are significantly off their highs of roughly 6 years ago, and the price for condos has dropped from a high of $200 per square foot to less than $150 per square foot.

In South Oakland, the need for warehouse and distribution space remains high. However, the availability of space is being impacted by a couple factors: the closure of the Oakland Army base — home to several large warehouse users — and the redevelopment of older warehouse buildings at the Alameda naval base, which is forcing tenants to relocate within the next 12 to 18 months. These displaced tenants are looking to relocate within the I-880 corridor as close to the Port of Oakland as possible, but it is proving difficult due to the lack of product.

Another factor with a long-term impact on the market came early on when the City of Oakland allowed many of the older manufacturing buildings to be purchased and converted to multifamily housing, which is reducing the availability of industrial product. The City of Oakland will be less willing to allow industrial property conversion in the future.

The good news for investors is that the overall market is strong, and there will always be industrial acquisitions and development within the corridor. Harvest Properties is actively acquiring existing product; SRM is developing the Harbor Bay Business Park; and Venture Corporation is building condos in Fremont, Newark, Alameda and Hercules.

Located on the shores of Alameda Bay near the Port of Oakland, the 100-acre Harbor Bay Business Park is a premier industrial project. SRM Development broke ground on Phase I in 2005 with five speculative buildings and four build-to-suits of which Peet’s Coffee was the largest at 150,000 square feet. In response to strong market demand, the speculative buildings in Phase I sold out almost immediately. Four new speculative buildings in the 10,000- to 20,000-square-foot range are currently under construction in Phase II, which is scheduled to be completed this summer.

Recent sales reflect the continuing strength of the large warehouse space segment of the market. In Fremont, a 450,000-square-foot warehouse was recently sold by the US Steel Pension Fund for $40 million, and, in San Leandro, Broadreach Capital Partners is in escrow to purchase the 450,000-square-foot former Kellogg’s manufacturing facility at a price rumored to be around $22 million. Also in San Leandro, a group of private investors has purchased a 265,000-square-foot, multi-tenant warehouse/manufacturing facility that will be completely renovated upon lease expirations.

Another factor that is shaping the future of the East Bay market is the increasing number of tenants snatching up large buildings on long-term leases. St. George Company signed a 10-year lease for a new 150,000-square-foot distribution facility in San Leandro because of its close proximity to the Port of Oakland. In Oakland, Dobake consolidated several area locations into a 120,000-square-foot manufacturing facility, formerly occupied by Mother’s Cookies.

Vacancy rates will remain tight on all warehouse and distribution product this year. Slowly, the R&D market will begin to absorb its oversupply, but will not likely reach the low levels of the warehouse and distribution space that the market enjoys today. The user-sale market will likely continue its gradual increase in values, which will reflect the supply on the market. The industrial condo market will absorb the excessive product that has been on the market for an extended period of time and the values will stabilize. Overall, the East Bay corridor is a blue-chip industrial market with product that will continue to be in demand as long as there is a stabilized economy without any economic dips or lending rate increases.

Craig Hagglund is a principal at Lee & Associates in Oakland.


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