Is the bloom off the rose in the Silicon Valley?

For years, manufacturers have insisted on putting factories in the greater San Jose area. The CIRCUITS ASSEMBLY Directory of EMS Companies lists hundreds of entries with Silicon Valley zip codes. Damn the costs — siting near customers — actual or desired — takes precedence!

In the first quarter, the most up-to-date data available, industrial space vacancy rates were 2.7%, near an 18-year low. That’s despite more than 200,000 sq. ft. of new industrial space coming online in the period, on top of about 3 million sq. ft. of new industrial space that came online last year.

Ironically, industrial space rents, while climbing, are a relative bargain. The average rent was $1.27 per sq. ft. in the March period, more than twice that in 2010 ($0.60 per sq. ft.), but well below the national average. That comes to more than $381,000 in rent a year for a modest 25,000 sq. ft. factory. But tack on energy, and labor costs — unemployment rates are not only lower than the national average, but workers earn a small fortune — and it all adds up to a very expensive enterprise.

Today the pendulum is shifting, if only bit by bit. We are seeing furloughs, layoffs and even some big names starting to blink. Jabil, Creation Technologies,
and this week, Benchmark are among those closing factories in Silicon Valley.

Will more follow? In an industry where margin and cash flow often make all the difference, it won’t be a surprise if more players head for lower-cost pastures.