WESTERN SNAPSHOT, APRIL 2008

East San Francisco Bay Industrial Market

The industrial and R&D marketplace in the Interstate 880 corridor, which encompasses more than 150 million square feet along the East Bay, continues to be driven by the Port of Oakland, the Oakland Airport and the Bay Area economy. While vacancy is tight and rates are strong, a shift in the direction of the market began toward the end of 2007 and will continue through 2008.

After 3 consecutive years of declining vacancy, the I-880 corridor saw a rise in vacancy in the final half of 2007. While rents remain strong and overall vacancy remains low, both tenants and owners are cautious for 2008, sensing the economic uncertainty caused by the subprime loan crash. Rates continued to rise throughout 2007, with an average of 5 percent per quarter, but have since stabilized. At the end of 2007, the overall market stands at 6 percent vacant – 6 percent in the warehouse/distribution market, 5 percent in industrial and 20 percent in R&D/flex. These numbers are destined to increase with an influx of larger product coming online this year. With a negative absorption of six listings exceeding 100,00 square feet in 2007, there are currently 10 spaces in this size range available for lease and several more coming available in 2008.

On the sale side, user sales remained steady throughout the I-880 corridor. Buildings less than 30,000 square feet still demand the highest per-square-foot price, often exceeding $120 per square foot. The number of completed deals thus far in 2008, however, has slowed. This is due in large part to the lack of inventory, but can also be partially attributed to the changes with the lending industry.

Investor activity continues to be very strong along the I-880 corridor. This market, however, has seen few opportunities during the past year. With multiple offers on nearly all fully leased offerings, coupled with the steady increase in owner-user sale prices, investors must justify a low cap rate on the basis of future rents. A few of the leased investment deals include DR Stephens’ purchase of a 167,000-square-foot R&D property in Fremont, AER Worldwide Holdings’ purchase of a 93,000-square-foot warehouse in Fremont, Cohen Asset Management’s purchase of 150,000-square-foot R&D property in Newark and TA Realty Associates’ acquisition in January 2008 of a 101,000-square-foot warehouse in Hayward at a 6.7 percent cap rate.

With an abundance of larger product on the market and very limited land opportunities for new development, a steady trend for investors is the redevelopment and repositioning of antiquated manufacturing buildings throughout the East Bay. For example, Fowler Property Acquisitions purchased the former Sunshine Biscuits factory in Oakland and is splitting the 535,000-square-foot project into smaller warehouse units for lease (and now has just five units totaling 82,000 square feet remaining available).

Ellis Partners continues its demising and re-leasing of the former Mother’s Cookies factory that it purchased in 2006 and now has just one 45,000-square-foot unit remaining of the 220,000 square feet for lease. Broadreach Capital Partners, which purchased the former Kellogg’s plant in San Leandro, is also converting the 450,000-square-foot project into smaller warehouse spaces for lease. Doolittle Williams LLC, which purchased the 426,000-square-foot former Scott Mechanical facility in San Leandro back in 2005, is now converting the former 100,000-square-foot office/processing space into incubator retail/showroom spaces for lease — a similar trend as seen with the 2005 sale of the 98,000-square-foot Gardco Lighting facility in San Leandro to Legallet Properties, which converted the project into 26 small, now nearly full, industrial units for lease in 2007.

While investors are buying larger facilities and breaking them down to smaller units for lease, speculators have ceased the industrial condominium-conversion trend of the past 2 years. Older multi-tenant buildings are no longer bought based on the value of condo sales and then put back out for sale in the form of smaller units. With vacant condos on the market, some for more than 2 years now, speculators are beginning to lower their original expectations and soften prices in order to absorb the surplus inventory.

With a shortage of available industrial land along the I-880 corridor, very little new development has occurred in the past 12 months. Two examples of speculative developments are Opus’ Fremont Tech Center, a 137,000-square-foot, 10-building project in Fremont that offers units from 2,500 to 12,500 square feet, and SRM Associates’ North Loop Center II in Alameda, a 110,000-square-foot, five-building project that is already half sold as of February 2008.

In the build-to-suit arena, there were two significant projects completed by Balch Enterprises in 2007 — a 86,000-square-foot building in Union City for La Terra Fina and a 62,000-square-foot building in Hayward for Maas Precision. In San Leandro, General Foundry and National Construction Rentals each acquired 4 acres and have begun construction on their new facilities.

Overall, the East Bay corridor remains an elite industrial market fueled by the Port of Oakland and the Bay Area economy. This market continues to provide functional and well-priced real estate to a wide consumer base. However, buyers, owners and tenants alike are much more uncertain of the coming year than in years past.

Chris Schofield is a principal at Lee & Associates in Oakland, California.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.