Logistics Leasing Surpasses Flex for the First Time Since 2020

The Silicon Valley industrial market is experiencing a notable trend. In the first quarter of 2024 the amount of logistics space leased in San Jose exceeded flex space leasing for the first time since 2020. This milestone highlights the surging demand for distribution and warehouse facilities, driven largely by the continued rise of e-commerce and supply chain expansion.

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Logistics Takes the Lead, For Now

• 4.1 million square feet of logistics space was leased in San Jose in the 12 months ending Q1 2024 — the highest annual total since 2019.
• This activity was boosted by Amazon’s pre-leasing of a 1 million-square-foot distribution center in Hollister, as well as DGA Services’ 386,000-square-foot lease at Fleming Business Park in Milpitas.
• In comparison, flex leasing totaled just 3.7 million square feet, the lowest level since 2021.

A word of caution: distribution and logistics properties are capturing tenant demand, surely some of which is a byproduct of strong tenant demand Bay Area wide in 2021 and 2022. The verdict is still out if logistics will continue to dominate, as one large lease makes up 25% of all logistics leasing activity for 2023 in Santa Clara County.

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E-Commerce Demand Remains Strong

According to the U.S. Census Bureau, e-commerce sales grew 7.5% year-over-year in Q4 2023, far outpacing the 2.8% growth in total retail sales. This trend is fueling ongoing demand for last-mile distribution, warehousing, and logistics hubs across the Bay Area.

For property owners, this creates opportunities to reposition assets or consider acquisitions in logistics-heavy corridors such as San Jose, Milpitas, and Fremont.

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Flex Market Faces Headwinds

While logistics is thriving, flex space leasing has slowed. The 3.7 million SF of flex leased in the past year represents a multi-year low. Several factors have contributed:

• Corporate efficiency pushes leading to staff reductions and reduced space needs.
• Notable move-outs, such as Infosys vacating 77,000 SF in Palo Alto after nearly a decade.

That said, Silicon Valley’s flex market still serves a diverse tenant base — from research and development to data centers, manufacturing, and assembly. And while some tenants are shrinking footprints, others in AI, robotics, and autonomous vehicles are expanding. For example, Equinix leased 240,000 SF of flex in South San Jose in mid-2023.

Bottom line: Flex remains an essential part of the industrial ecosystem, but near-term demand is more selective compared to the logistics surge.

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New Inventory of Distribution and Logistics Projects: Cautious Optimism in South Santa Clara

One of the biggest questions for industrial property owners in Silicon Valley is how the wave of new inventory — especially in the southern end of the Santa Clara market — will be absorbed. Developers have delivered millions of square feet over the past few years across the Bay Area, and leasing activity has varied widely.

Riding the wave of occupier growth, projects delivered throughout 2021 and 2022 were more often pre-leased prior to construction. However, with occupier interest slowing, a handful of projects have been delivered and are in pursuit of suitors. One example includes Butterfield Tech Park in Morgan Hill, developed by Invesco. Since its completion in 2022, the project has secured one lease of approximately 85,000 square feet. Despite the slower lease-up, the project underscores both the scale of modern industrial development in the South Bay and the need for patience as tenant demand gradually catches up with supply.

San Jose Logistics Center at 650 N King Road is another example of development delivery post peak occupier rush.

• ±212,683 SF of modern, Class A warehouse space available for lease.
• Features include high clear heights, ample dock loading, ESFR sprinklers, and superior truck circulation.
• Its location in the heart of San Jose provides immediate access to Highway 101, I-880, and I-680, making it ideal for tenants needing last-mile distribution and regional logistics connectivity.

Facilities like San Jose Logistics Center demonstrate that well-located, high-quality industrial product is still in demand. With logistics tenants driving the bulk of new leasing activity, centrally located warehouses are positioned to outperform in the current cycle.

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Looking Ahead

While absorption has lagged in certain new projects, the long-term fundamentals remain strong. The combination of e-commerce growth, tenant expansions in technology sectors, and Silicon Valley’s strategic logistics location suggests that this space will eventually be absorbed — though not without competitive concessions in the near term.

Both flex and logistics segments are expected to benefit from an improving economy in the quarters ahead. However, the momentum is clearly in distribution and logistics, where e-commerce growth, consumer demand, and supply chain investment are reshaping Silicon Valley’s industrial landscape.

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🔑 Key Takeaways for Silicon Valley Industrial Property Owners

• Logistics demand is surging, with leasing outpacing flex for the first time in four years.
• E-commerce continues to drive absorption, creating opportunities for warehouse and distribution owners.
• Flex space faces challenges but remains relevant for AI, robotics, and data-driven tenants.
• New inventory in South Santa Clara has been slow to lease, but demand is expected to catch up.

Sean Offers, SIOR, Lee & Associates East Bay