Big tech drives changes in Silicon Valley’s industrial, manufacturing landscape

Not long ago, if one weren’t from Silicon Valley — a slice of California that is a place, hit television series and household name — they might drive right through without even realizing where they’ve been.

That’s beginning to change, though understated has long been the Silicon Valley way. The region, once called the Valley of Heart’s Delight when it was filled with orchards, got its current moniker in the 70s for its reputation as a manufacturing hub for computer chips that power some of the most cutting edge technology work in the world.

The buildings where those little, but powerful, chips were made weren’t particularly fancy; they consisted primarily of nondescript, concrete, tilt-up boxes dotted with windows. The importance of what was happening inside could easily be missed by passers-by.

But in recent years, flashy new tech campuses have cropped up, creating a series of landmarks to tell visitors: “Yes, you’ve arrived!” and “No, we don’t mind if you take a picture in front of the sign.”

As shiny and big as those sprawling campuses may seem, an even bigger — though quieter — trend is changing the landscape of the very industry that gave the region its name decades ago: manufacturing.

Major technology companies in recent years have entered the manufacturing and industrial scene, snapping up spaces throughout the Valley, but also increasingly transforming them into hybrid buildings, often with a mix of office-like research space alongside manufacturing and sometimes storage.

“Today most of our industrial (space) is really just a big garage for tech,” said Rob Shannon, executive vice president for brokerage company CBRE, during a panel on advanced manufacturing at the annual Silicon Valley Economic Development Alliance conference last month.

“It’s hard because every day there’s something different, and that’s why it’s challenging for us on the supply side to be able to reflect correctly what those needs are,” he added.

Rather than chipmaking and product storage, some tech companies are scooping up warehouse spaces to store the office supplies for their tech employees. Others are using the industrial space to make advancements in 3-D printing for real estate development — an emerging field as the region struggles with its housing crisis. Robots have become common helpers in industrial and manufacturing buildings, Shannon said.

One of the big drivers of the shift is the dozens, if not more, companies that have flooded the region to create outposts where they can study autonomous vehicle technology, mixing tech and research with, essentially, garage space.

“Think of industries, like automotive that 10 years ago you might not have associated so much with the Bay Area, but now the Bay Area in a meaningful way has been able to shift the center of gravity of that industry right into our market,” said Will Parker, a local principal at Dallas, Texas-based developer Trammell Crow, during the panel.

New industrial and manufacturing space is being designed with these types of high-tech tenants in mind, offering higher ceilings, large garage doors and other amenities that can woo the region’s tech talent.

That space is often leased as fast as it is built, which is no surprise in Silicon Valley, where the industrial vacancy rate currently sits at a mere 2 percent, according to recent CBRE data.

By the end of the year, 3.4 million square feet of industrial space is set to open in the region, but more than 50 percent of it has already been leased, CBRE notes in its recent quarterly report.

Meanwhile, three new industrial buildings started construction in San Jose this year, totaling a combined 780,000 square feet in the city. Overall, 4.1 million square feet of industrial space is under construction across Silicon Valley, the brokerage’s data shows.

“I don’t think we have the building stock to support the growth (in the industry),” Parker said. “We have the employees, we have the expertise, we have the projected manufacturing job growth going forward… but we really don’t have the inventory to support that.”

Despite what a hot market Silicon Valley is seeing when it comes to manufacturing, it’s important to note that not all industrial and manufacturing space is considered a hot commodity, Parker said.

Some existing industrial buildings are severely outdated, too short and many are too small for the leasing trends of today, he said.

“We’re seeing the same patterns in the industrial market and also the office market,” Parker said. “It sounds funny to say this, because a 200,000 or 250,000 square foot office project — that’s a big project, but from a technology, or major Silicon Valley user perspective, it’s not. You really need to offer more than that.”

The big question in the future of industrial real estate in Silicon Valley, where developable land is a hot — and expensive — commodity, is whether the new industrial buildings will ever start to rise above a single story, as they have started to do in some other areas.

“It would be hard for me to picture that working,” Parker said, noting the rents would need to be significantly higher in the region than they are today to make it work financially.

But Shannon took a more optimistic tone.

“Will it happen? Sure,” he said. “Every market matures.”

Contact Janice Bitters at [email protected] or follow @JaniceBitters on Twitter.