Are Shifting Market Trends Cause for Landlord Concern?

The Silicon Valley submarket is comprised of Santa Clara County, including communities of Milpitas, San Jose, Morgan Hill, and Gilroy. The industrial market showed mixed performance in Q2 2024. While demand for high-quality logistics and warehouse space remains, new deliveries in South Santa Clara County have pushed vacancy upward and kept absorption in negative territory. Still, rents held steady, reflecting the region’s resilience as a core industrial hub for the Bay Area.

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Key Market Indicators – Q2 2024

• Vacancy Rate: 4.1%, up from 3.2% in Q1
• Net Absorption: Negative 434,000 SF, continuing the trend of occupancy losses
• Average Asking Rent: $1.53/SF NNN, up 5.5% year-over-year
• New Deliveries: 383,000 SF completed (McCarthy Business Park in Gilroy & Cochrane Technology Center in Morgan Hill
• Under Construction: 1.4 million SF still in the pipeline, with deliveries expected in the next four quarters

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Vacancy & Availability Trends

Vacancy rose modestly as new projects hit the market fully vacant, particularly in Gilroy and Morgan Hill, where availability reached 19%. By contrast, core infill submarkets such as Santa Clara (2.7%) and San Jose (4.2%) remain tighter, highlighting continued tenant preference for well-located industrial buildings.

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Rent Performance

Despite higher vacancy, average asking rents increased to $1.53/SF NNN, a 5.5% jump year-over-year. Industrial rents dipped slightly from Q1, but warehouse rents climbed 2.2% over the same period, showing steady demand for logistics product.

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Construction & Deliveries

Two notable projects were delivered in Q2:

• Cochrane Technology Center (Morgan Hill) – 501,000 SF across five buildings
• McCarthy Business Park (Gilroy) – 383,000 SF across two buildings

Both projects were delivered vacant, contributing to higher availability rates in South Santa Clara County. Meanwhile, 1.4M SF remains under construction in the region, primarily in Fremont and San Jose, which will add to supply pressure later in 2024.

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Owner Takeaways

For Silicon Valley industrial property owners, the Q2 2024 data highlights a market in transition:

• Core locations remain strong: Santa Clara, Fremont, and San Jose continue to command attention with lower vacancy and steady rents.
• South County faces challenges: New deliveries in Morgan Hill and Gilroy are pushing vacancy higher, requiring patience and concessions.
• Rents are holding steady: Even with vacancy increases, demand for modern, well-located space is supporting rent growth.
• Focus on tenant retention: With more space hitting the market, keeping existing tenants in place is critical to protecting NOI.

Data Source – Costar

Sean Offers, SIOR, Principal – Lee & Associates East Bay