With sublease space increasing at dramatic rates and speculative projects, fueled by the 1997 fervor, coming on line, there was trepidation in the Silicon Valley real estate market. And for the first quarter of 1999, that fear seemed to be warranted due to limited activity, increasing vacancy rates, and reaching a plateau in lease rates. However, beginning in the second quarter, the Internet community, networking companies and chip manufacturers began taking space in large segments. The vacancy rates have started to mirror the unemployment rates on the Peninsula and that activity began to spread through the southern and eastern parts of Silicon Valley during the third quarter and further in the remainder of the year.
As predicted in last year’s forecast, the East Bay industrial market witnessed an unprecedented movement of tenants from surrounding areas. In-migration proved to be a key factor as various software companies moved up the I-880 corridor from Silicon Valley and across the San Mateo and Dumbarton bridges from the San Francisco Peninsula. Silicon Valley seems to be stretching across county lines and is now seen as creeping into Alameda County, via the cities of Fremont, Newark, Union City and Tri-Valley. Movement to the East Bay prompted lease rates to rise and, more importantly, owners made a swift transition from quoting industrial-gross to triple-net rents, as well as limiting tenant improvement allowances with less room for lease negotiations.
The Sacramento industrial real estate market has shown impressive resilience in a market with a shifting base. For the first time in several years, activity was not driven by the largest of Sacramento’s high-tech companies. Many of these firms even slowed or postponed their ambitious expansion plans of 1997 and 1998 due to international economic “storm clouds.” The slack was taken up by low-tech distribution facilities and warehousing, as well as small to medium-size electronics firms. Overall market conditions remained positive with a low vacancy rate, roughly a 4% increase in gross absorption, and an increase in the amount of industrial space under construction from 1998 levels. The strength of the industrial market is evidence of the Sacramento region’s ability to tap into new user potential.
In Portland, the massive number of recently constructed projects has caused industrial vacancy to remain higher than usual. At 10.1%, this is one of the highest vacancy rates in the last few years. However, the market itself is still quite healthy and strong leasing activity continues to help absorb the new inventory.
Vacancy in the high-tech sector in Seattle skidded to less than 4% in 1999, as biotech and computer-related firms scrambled for growth space on the east side, close to their employee base. The vacancy rate for warehouse/distribution space was somewhat higher,around 5.6% in the Kent Valley and close-in markets,partly due to the release of excess Boeing space into the market. Despite the addition of 5 million square feet of new space, the industrial market was reasonably balanced at the end of 1999. Land pressure remains the biggest problem. Reasonably priced, properly zoned land is becoming harder to find to the north and east of Seattle. This has pushed development southward. Some industrial tenants also have been been chased southward from areas close to the Port because of the new baseball stadium and proposed transit center.
For the seventh year in a row, Northern Nevada has experienced rock-solid growth in its industrial market. Average gross absorption since 1993 has run a respectable 4.2 million square feet, with net absorption averaging 1.96 million square feet per year. By year-end, vacancy can be expected to be less than 8%, down from a market high three years ago of almost 11%. Location is fueling the growth. Reno’s proximity to markets in 11 Western states, good tax climate, right-to-work laws, and good air and surface transportation systems combine to make Reno a logical place to operate warehousing and distribution businesses.
Salt Lake City’s construction boom has made its mark. The county’s industrial inventory has grown by approximately 5% during each of the past three years. Due to this extensive construction, vacancy peaked in the first quarter of 1999 at 7.5%. The large amount of available new space significantly affected rents, causing rates for standard industrial space to fall 6%, after having already dropped 3% in 1998. In addition to lower rents, landlords also began offering other concessions to attract tenants to their projects. This overbuilding has been exacerbated by freeway and roadway construction. On the bright side, Salt Lake County saw increasing absorption in 1999 and slowing construction that allowed the vacancy rate to fall back to 7.0% by year-end.
Last year was another great one for the Denver industrial market. More than 2.75 million square feet of new space was added last year, yet the vacancy rate remained below 6%. The Airport/Montbello market had another strong year. As several 100,000-plus-square-foot deals were done and two build-to-suits were completed that were each larger than 300,000 square feet. Lease rates remained fairly stable throughout the entire market.
In Colorado Springs, more than 984,000 square feet was added to the market, making 1999 the second-biggest construction year of the decade. “Down and dirty” construction gave way to upscale industrial projects that saw more than 70% of the new space taken off the market before construction was finalized. Six years of historically low vacancy rates had afforded little opportunity for expansions; however, this changed in 1999. Developers responded to this demand and upscale industrial developments started anew in Colorado Springs. In most cases, flex space led the expansions.
The second half of 1999 proved to be a prosperous time for the Phoenix industrial market. Vacancy rates inched downward as speculative properties absorbed space faster than developers could build it. Construction throughout metro Phoenix remained strong as all but two submarkets saw a substantial number of projects either being built or in the planning stages. Industrial land prices rose substantially as the inventory of developed lots dwindled. Overall rental rates also saw slight increases, as the demand for industrial space remained healthy.
Tucson’s industrial economic sector and its real estate market thrived. Industrial sector growth was led by major expansions of Raytheon, IBM, Intuit, Bombardier, and Weiser Lock. To serve this sector, the total industrial inventory grew by 2.5% in 1999, to just under 33 million square feet. The competitive, leasable inventory grew by 171,000 square feet. The growing inventory did not quite keep pace with business expansions, as vacancy rates dropped steadily during the year. Lease rates stayed generally level, with slight increases in the high-demand submarkets, such as the Northwest, and product types, such as R & D;/flex space. Well-positioned business parks attracted most tenants and buyers.
A shortage of available inventory in Albuquerque has stimulated increased sales of existing finished industrial lots and there is a resultant price upswing in the industrial land market. Where industrial land goes for $1 per square foot in El Paso, Texas, to the south, in Albuquerque it goes for $4 a square foot. The market has low availability of properly zoned land. Demand is high among both owner-occupants and tenants for freestanding, smaller buildings in the 10,000 square foot-to-30,000 square foot range. Small industrial condos are hot properties, including those in the I-25 corridor, priced at $70 to $85 per square foot. The hottest new industrial subdivision is the Alameda Business Park, a 66-acre site at Alameda and Edith. The property, which will include 500,000 square feet at build-out, is two-thirds leased at $4.10 to $5.25 a square foot, before breaking ground. There has been a noticeable upswing in construction of spec industrial space in the wake of such manufacturing facilities as the Levi Strauss, Amity, Siemens and Digital plants selling, with two of them converting to office-retail. Cross-dock facilities, a growing area, are now leasing at $400 per door.
The key word that describes the Dallas/Fort Worth industrial market is “stability.” Rental rates have continued to increase for warehouse and distribution product, at $4.19 per square foot, and have begun to stabilize for R & D;/flex product at $8.37 per square foot. The market continues to evolve into a nationally recognized major warehousing and distribution hub.
Meanwhile, Houston’s industrial real estate market continued to be vigorous, with construction activity at its highest levels since the early 1980s. Leasing activity was strong in all submarkets, but in the Northwest submarket leasing did not maintained the same frenetic pace as construction activity. Although Houston has diversified greatly during the 1990s, approximately 50% of its economic output is driven by the energy and petrochemical industries. There is no shortage of capital for construction of additional product. In fact, the availability of capital may be driving much of the construction, particularly in the Northwest submarket.
The delivery of several speculative construction projects nudged San Antonio’s industrial vacancy rate up in the fourth quarter, although year-end net-absorption and rental-rate figures prove that the market is still going strong. R & D;/flex space,which comprises less than 20% of the total market,accounted for 40% of the year’s net absorption, and new developments are successfully luring tenants away from more traditional office properties. Rental rates grew in every product type, rebounding nicely from a slight mid-year slump.
