October 1, 2014
by Sethena Leiker
Senior Analyst, Silicon Valley
The Silicon Valley benefited from steady employment gains through the third quarter, further strengthening the local economy. The tech sector continued to fuel the local expanding employment base by adding 10,700 jobs over the last year, 2,100 added during the third quarter according to Moody’s Analytics. The manufacturing industry added jobs, albeit at a much slower clip: the employment base expanded by 2.7% over the last year, representing 4,200 new jobs.
New Development Secures Largest Leases
The Silicon Valley industrial market is advancing on all fronts. Leasing activity was strong through the first three quarters, with a total of 10.3 million square feet (msf) leased, 23.2% more than a year ago and if the current momentum is carried through the fourth quarter, leasing figures are poised to be the highest since 2007.
Demand for high tech space is on par with the third quarter of last year at 5.4 msf leased year-to-date. Although tech requirements drive the local industrial market, the need for traditional industrial space has skyrocketed in the last three quarters: 2.1 msf of manufacturing space was leased, 28.3% more than all of last year while 2.7 msf of warehouse distribution leasing activity took place during the same time reflecting a 21.1% increase over the entire previous year.
Preleasing of new development was a strong theme during the third quarter: 92.1% of the 1.3 msf currently under construction has been preleased, leaving only 102,000 sf of new construction in the available inventory.
The market-wide high tech direct net asking rent maintained upward trajectory resulting in a 9.8% increase from a year ago to $1.45 per square foot per month (psf/mo) while the average asking rate for warehouse distribution space hiked 13.5% to $0.59 psf/mo. Although the weighted average asking rent for manufacturing space depreciated by 9.8% over the last year to $0.74 psf/mo, the 3.2% vacancy rate suggests the current average is heavily weighted by outdated inventory that will likely be slated for renovation or redevelopment.
High Profile: Verizon and Oovala
The highest quality space capable of accommodating contemporary function was the first to lease at the start of the recovery. Given the strong level of demand, new development and modern renovations would be welcomed by the market. High tech renovations, accelerated during the past two years, was proven successful in capturing high profile tenants such as Verizon and Ooyala. Nevertheless, it is likely we will see an uptick in renovations to reposition some of the remaining inventory in the coming year.
Outlook: 4.4% Increase Projected
Silicon Valley’s high tech employment gains are expected to remain strong in the near-term with a 4.4% increase projected through the end of the year, with an additional 7,400 jobs in 2015, according to Moody’s Analytics. As a result of healthy employment growth, expansion requirements will remain steady leading to positive occupancy gains. As vacancy rates continue to decline, and new construction is slow to provide relief, average asking rents will maintain steady increases. As the moderate supply under construction is scheduled for occupancy upon delivery, additional planned development projects are likely to advance.
To contact Sethena, please send an email to: Sethena.Leiker@cushwake.com