As per usual, San Jose's industrial market continues to shine year after year. However, this is not to say that Covid-19 hasn't had a negative effect on the industrial market. Industrial vacancies slipped despite a spike in e-commerce sales in San Jose's predominately flex and R&D spaces. In addition, pricing of the current volume has leveled off it's near decade increase year after year.
We are starting to see the following trends:
Vacancy rates are increasing -by about 7% - larger than retail
Leasing activity is stagnant for now- by a small margin from last year
Rent growth is still increasing - by about $1 per square foot from last year
Construction is still increasing - by 1 million square feet from last year
Sales activity is slightly down - by a hundred + transactions from last year
Higher availability rates of subleases - by a couple million square feet
More and more tenants are getting out of dodge here in San Jose by closing businesses completely or moving shop. Despite the harsh news of tenants decisions to move out, last year had a large increase in tenant occupancy; thus making the negative effects of Covid-19 marginal.
Curiously enough, tenants vacating are often filled by others who are succeeding in the e-commerce boom in San Jose. Amazon, a company who is undoubtedly a titan in the recent e-commerce boom picked up a large distribution center near one of my industrial properties for lease.
Overall, industrial vacancies can be explained on a spectrum, depending on who you ask here in San Jose. Some are winners, some are losers. One things for sure, demand is still high and rents are increasing.
Industrial markets shortcomings:
I've been on the hunt for industrial properties for a couple clients of mine and I can't begin to explain how tight the market is for the average working man. I often tell my clients, "beggars can't be choosers." But in the larger scope of the 200k+ square foot market, there's some new options!
The grass may be greener ... just over thereut severely amplified by Covid-19's effect, is that San Jose shows despite a national pandemic, Industrial rates are going up. Thus, this fact shows San Jose's inability to cater to developers wishes for the dirt foot being reasonable and zoning to wash in their favor. While there are some new vacancies, demand for properties are starting to flip in the long run; more on that later in my predictions.
Lastly, San Jose's resiliency for keeping the Industrial market rents and land high during Covid-19 is showing that most tenants are looking to other places for cheaper rents!
The grass may be greener ...just over there; the East Bay
Commercial Real Estate Predictions in Retail:
Unlike the retail market, the industrial market will start to see a rebound in some areas and a decline in others. Lets explain!
Vacancy rates will rebound from a dip in 2020 but start to increase by about 2% in 2021; then settling for a plateau for some more years. Vacancy rates are directly tied to Availability, thus we'll see the same thing. And yes... we should see an increase in rents by about a $0.20 increase by next year; 2021. Furthermore, some tenants are starting to show signs of withholding any movement of their business till things fare better, therefore we're predicting leasing activity to stall for a couple months on each property.
While rents have been the highest in the nation's growth, doubling since 2010, landlords will continue to use leverage in demanding like minded rents. This is in part due to the availability of e-commerce titans who are faring well during this pandemic (as mentioned earlier in this post)
Keep in mind, San Jose has the highest average rents in the nation. Covid-19 shouldn't have a massive change in the negative direction.
Construction in San Jose will continue to shutter, as mentioned earlier with rising rents and strong demand for land/redevelopment opportunities. However, there are some notable under construction centers popping up in various locations. Sales on the other hand are continuing to improve, even during this pandemic. There continues to be investment in the Valley from companies like Google and other biotech firms.
*Stay tuned on an in-depth analysis of San Jose's overall economy
So what can we do in the meantime?
If you're a business person looking to start a business, don't hold your chips.
"Chaos breeds opportunity"
Find yourself someone who understands: Covid-19, business and future trends of the market. We can't for sure say when this will all end and our comfy normal will make its long awaited entrance. But for now and for the next year we can say safely to embrace the New Normal.
Doing something is better than doing nothing!
Not to mention touring properties can be a pain with the new protocols, so if you're an agent or landlord looking to get fantastic photos of your commercial real estate property, give us a call; we can help! It's a breeze to get a virtual tour going and we provide this service at the best value in the entire Bay Area.
Check out our other blog post going over how to start a virtual tour of your property. Give us call today to find out how we can help overcome the challenge of leasing out a commercial space during these times.