Q4 2024 San Francisco Industrial Market Report
Key Findings
- Industrial rents are among the highest in the country, at $28.00 per square foot, reflecting high land and operating costs. However, the pace of rent growth is among the lowest. Rents have fallen by 0.3% over the last year.
- Vacancies have risen and now stand at 12.5%. For flex space, the vacancy rate has increased to 23.2%, driven by new supply coming in.
- Leasing activity in the flex segment grew in 2024, with more space leased in the first three quarters than in all of 2023, despite some continued downsizing.
By the Numbers
- Deliveries in SF: 2.1M
- Absorption in SF: (1.3M)
- SF Under Construction: 3.5M
- Sales Volume: $256M
- Cap Rate: 5.9%
- Average Sales Price per SF: $429
- Vacancy Rate: 12.5%
- Rent Growth: -0.4% | 2024 | Source: CoStar Group
San Francisco Demographics
- Unemployment Rate: 3.8%
- Current Population: 1,559,359
- Households: 641,985
- Median Household Income: $138,544
The San Francisco Bay Area is a global leader in IT innovation and development. San Francisco and San Jose, home to several of the world’s largest corporations, including Apple, Alphabet, NVIDIA, and Meta, have the nation’s greatest metropolitan economic growth rates. This translates to strong earnings and national-level household income increases. As a result, San Francisco boasts some of the nation’s highest rents and prices in all real estate asset classes. Total employment is currently slightly higher than it was pre-pandemic. However, with the rise of flexible working habits, it is unknown how many San Francisco-based employees reside in the metropolitan area.
Market Performance
Over the last year, the focus of weak demand has switched from the flex segment to logistics. The consumer spending bubble of 2021 to 2022, which prompted retailers and wholesalers to lease additional space, has come to an end due to high lending rates, and industrial tenants have dramatically reduced their leasing activity. Leasing in the logistics market will be 30% lower in 2024 compared to 2023. Furthermore, move-outs have surpassed move-ins by two to one.
While some shrinkage continues, leasing activity in the flex segment has grown in 2024, with more space leased in the first three quarters than in all of 2023. The continued weakness in demand and ongoing supply increase will result in higher vacancies and limited rent growth in the coming year.
Construction
San Francisco’s industrial market is experiencing historically high levels of development, with around 2.1 million square feet delivered in the last year and 3.5 million square feet currently under construction. All of these projects are flex buildings designed primarily to provide R&D space for the life science/biotech industry. In recent years, this sector has experienced rapid growth and increased occupier demand. However, as interest rate hikes cut funding for biotech businesses, tenants have scaled back their expansion ambitions during the last two years.
Sales
Weak tenant demand has hampered rent growth possibilities, while rising interest rates have raised investor return expectations. The result is decreased values and a pullback by buyers. Institutional investors have significantly reduced their buying activities, while individual purchasers and owner-users are finding greater opportunities to acquire assets. Recently, owners/users have increased their acquisition activity. As of the first quarter of 2024, owner/users accounted for 31% of acquisitions in the previous 12 months. For example, in March, Genentech paid $36.5 million for the 31,700-square-foot warehouse at 525 Dna Way, or $1,152 per square foot.
