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NEW YORK—San Francisco has been a valued marketplace for many different asset types—just not so much industrial. Yet, as Newmark Knight Frank noted in a new report, that is rapidly changing.

Demand for Class A industrial space in the metro area has skyrocketed over the past three years, growing from fewer than 50,000 square feet of requirements in the market at the start of 2017 to more than 1.7 million square feet of requirements by the end of 2019, it said. In addition, over the past three years, asking rents for Class A industrial space have grown 35.9%. The market has responded, according to NKF: 1.1 million square feet of Class A industrial space has been developed or renovated in that time, and another 1 million square feet is proposed over the next three years.

What has been San Francisco's secret? Many other markets that are challenged in the industrial sector would like to know.

The answer is simple and perhaps not surprising: technology, which has been San Francisco's forte for years.

New companies that have seemingly little to do with commercial real estate are transforming how industrial space is used. These companies are leveraging artificial intelligence, machine learning, advanced manufacturing, robotics, and drones to maximize every link in the supply chain.

The good news for other markets is that these efforts will ultimately spread, NKF said in its report. "As these new companies seek to revolutionize industrial space and continue to expand, we should expect to see increased demand for Class A industrial space in other markets as well."

Venture capital is backing these developments, according to PitchBook, which reports that these capital providers invested approximately $19.3 billion in supply chain technology in 2018, setting a record for the industry. While 2019 did not top that record, it was another strong year, NKF said. It noted that International Data Corporation reported that of the $37.5 billion spent on artificial intelligence and machine learning in 2019, sales process recommendation and automation accounts for 25%."

These changes in supply chain back office technologies are translating into new commercial real estate needs. "A number of new companies have emerged to capitalize on upgraded technology in the industrial real estate sector," the NKF report said. "These include companies like Flexe in Seattle and Stord in Atlanta, which have developed online national marketplaces for warehousing-on-demand, changing the way distributors plan for inventory space needs, especially those with seasonal fluctuation."

There are now robotics-as-a-service companies, such as RightHand Robotics in Somerville, Mass., which provides short-term integrated robotic piece-picking solutions to help with order fulfillment, NKF also added.

Another example: Enterprise supply chain management company Faire operates an online wholesale marketplace of thousands of makers, allowing local retailers to curate inventory with the same efficiencies as their large-box competitors.

In addition to these new companies, autonomous vehicles are maximizing the movement of goods in shipyards, docks and warehouses. The trend of the expanding distribution center is now also moving upward, NKF said, as more efficient sorting and picking technology has allowed distribution centers to build higher.

The number of distribution facilities with ceiling heights of at least 40 feet has increased materially since 2017, it noted.