In an effort to highlight national and local trends in real estate, technology, and manufacturing, we recently caught up with Kelly Gray, Vice President of Brokerage and Location Advisory at Jones Lang LaSalle, for her insights on industrial real estate.

1. What dynamics are driving the strong market demand for industrial buildings in Fremont and the East Bay?

KG: There are three main factors playing into the industrial real estate market demand in this area.

  • Ecommerce – the desire to get closer to the end user for parcel delivery (for example, recent FedEx and Amazon deals in East Bay)
  • Growing population in the Bay Area and high consumer spending habits of Bay Area residents (for example, Living Spaces)
  • Automotive industry – Tesla is increasing production while Apple and others are taking down industrial space for testing of autonomous vehicles.

2. How can cities in the Silicon Valley area support the continued growth of the industrial sector?

KG: Continue to be open to zoning for industrial use. The concept of rezoning or redeveloping industrial land for a “higher and better use” is prolific in the Bay Area. Over 10 million square feet of space has been taken out of the market in the past five years. This is driving down vacancies and pushing prices within the Bay Area to record levels, for example, the Facebook and Google displacements of industrial users in Menlo Park and Sunnyvale.

Local regulations on truck traffic also curb industrial development, especially for “big box” industrial (250,000 square feet, high clear distribution centers) such as Amazon in Newark. Industrial development is a great way to add economic stability to an area and allow for employment opportunities for a diverse workforce. Historically, office and residential rents commanded higher land costs on a “per square foot” basis and provided higher taxes, but I think recent industrial success stories will prove otherwise.

Often, people do not think about how the goods they buy end up on store shelves or doorsteps. The concept that it takes over 70 million square feet of real estate in the Bay Area to make it happen is unknown. Industrial just isn’t as sexy as office and residential. It’s function over form.

3. Can you provide some insider real estate tips for companies interested in expanding or entering Fremont’s market?

KG: First, do the math. Determine the cost-qualitative trade-offs between Fremont vs. cheaper, further locations like South San Jose or the Central Valley. If you need to be in Fremont, either for the transportation, the diverse workforce, the density of engineers, etc., then ignore the sticker shock and pay the extra rent.

If leasing, take the plunge on longer term rents and negotiate renewal options. If you can get a purchase option, take it. With demand up and supply dwindling, space will only get more difficult to come by and acquire. If you have the opportunity and the capital to purchase, go for it.

4. In the next 24 months, what can we expect in the industrial market in Fremont and the East Bay?

KG: This year in the Bay Area, signs indicate that we may be at the top of a bull market for real estate. A correction can be expected in the next twelve months, but not drastic.

In the next five years, the Bay Area market will continue seeing record rental rates and low vacancies as office and residential demand cannibalize industrial space. The industrial will push out to the Central Valley. Ultra-high volume consumer distribution (Amazon, FedEx, and UPS) will pay the extra money to stay close to the population. If property costs continue to rise, the Bay Area may be the first market to see multi-story industrial in the U.S.

5. When do you predict the City of Fremont will see multi-level industrial space?

KG: It will be a race between ever-increasing land values and autonomous driving technology. If autonomous car and truck fleets free up parking spaces for increased land utilization, then it could delay the multi-story industrial. If not, I could see it happening with the big players, like Amazon, in five years, relatively the same horizon for autonomous cars.