Developer Proposes Distribution Center for San Jose’s Coyote Valley

Monday, January 4th 2016

SAN JOSE, CA – It’s been so long since anyone proposed commercial development in San Jose’s Coyote Valley that many real estate observers have written it off as all but dead. But the city’s southern reaches are now starting to show signs of life, thanks to the booming industrial sector.

Panattoni Development Company has submitted an application to develop a mammoth warehouse/distribution center on a 30-acre site just off Blanchard Road at Monterey Highway. The 517,000-square-foot project would mark a milestone for an area that has seen big real estate visions come and go, but little actual development in recent years.

What’s changing things now? With e-commerce exploding, companies are rushing to set up distribution and logistics centers close to urban centers — and South San Jose fits the bill, said Timothy W. Schaedler, a partner with Panattoni.

“There has been over six million square feet of industrial buildings repurposed for higher and better uses in the Bay Area, and only three million square feet of new industrial product has been replaced,” Schaedler said in an email. “All the while, a new industrial segment has evolved that services e-commerce orders, [and] that segment wants to be in close proximity to the Bay Area population. South San Jose is within 20 miles of a very dense population, and has a reverse commute.”

The proposed project site, currently agricultural land, sits in a neighborhood steeped in South Bay real estate lore and visions of what might have been. In the 1980s, developers proposed building thousands of homes on 5,000 acres of the 7,400-acre Coyote Valley. Activists fought back and the plan wasn’t approved, but the city did end up allowing hundreds of acres to be used for industrial development.

That same decade, Apple Computer acquired hundreds of acres in Coyote Valleyfor a possible headquarters campus. Of course, Apple ended up staying in Cupertino, and sold the land in 1998 to Brandenburg Properties. (Apple is now expanding into San Jose — on the city’s north side.)

In the late-1990s, Cisco Systems planned to build a controversial 6.6-million-square-foot campus on 688 acres that wrap around the current Panattoni site. The Coyote Valley Research Park won approval in 2000, but a year later Cisco put it on hold, and it eventually pulled the plug.

In the years that followed, no significant commercial development proposals emerged in the area, as the city focused on developing jobs in North San Jose and downtown. Earlier this year, the Mercury News suggested that Coyote Valley’s future was probably as a massive open-space preserve. But North Coyote Valley remains zoned for industrial uses, and it was likely only a matter of time before rising land prices and shrinking availability elsewhere stirred up activity anew.

Indeed, lately much industrial development has focused on Fremont and Newark, where Tesla Motors and its supplier ecosystem is spurring demand for new, modern warehouses. But developers like Panattoni — one of the largest privately held industrial developers in the country — believe there’s enough demand to spur developments in new markets, too.

“Fremont has seen [success], and we have successfully built new warehouses there, but we are getting uncomfortable with the cost of land in Fremont,” Schaedler said. “Our rent in South San Jose will be 20 percent less expensive than new comparable product in Fremont.”

The new project comes amid a burst of development of large-scale warehouse/distribution centers in the Bay Area, some of which have produced very nice paydays for investors. In Fremont, Overton Moore leased up its Crossings @ 880 warehouse campus to strong tenants including Apple, then sold it in August for $133.3 million, or $193 per square foot.

Panattoni’s proposed new building will feature the kind of massive footprint, towering 36-foot-tall “clear heights” and high-tech fire sprinklers that are prized by today’s big e-commerce giants like Amazon. (Amazon in 2014 leased a similarly sized building in Newark, which it is using as a “sortation center” — a site where sealed packages are sorted by ZIP code and sent off to post offices, increasing efficiency.) Panattoni plans to start construction on the project “on spec,” meaning it does not have a tenant signed. The goal is to start construction in September of 2016. Jim and Craig Kovaleski of Cushman & Wakefield are the listing agents.
This is not Panattoni’s only project in the wider area. Less than two miles north, the company is building a new warehouse for DBI Beverage, as well as a 111,000-square-foot warehouse building next door that is not yet leased. Construction should start in January.
Panattoni has other Northern California industrial projects in the works right now in Napa, Fairfield, Stockton, Santa Rosa, Sacramento, Davis and Citrus Heights. The company expects to start $1.3 billion worth of new industrial projects across the U.S., Canada and Europe in 2016.
While the San Jose project joins a couple others in the Bay Area pipeline, Schaedler doesn’t see a glut.
“Supply and demand are very healthy for industrial product in the Bay Area,” he said. “Modern product will see the highest rents ever achieved in the Bay Area in 2016. The only thing that could slow down industrial is lack of available land.”