SAN DIEGO’S INDUSTRIAL MARKET IS STEADY WITH STRONG LEASING ACTIVITY

Industrial construction is at a post-recession high

According to CBRE’s research, the San Diego industrial market was slow and steady in Q2 with strong leasing activity.

Net absorption was positive for the fifth straight quarter with 67,478 sq. ft., while leasing activity was 3.5 percent higher than a year ago and the overall vacancy rate in the region dropped 60 bps year over year. Vacancy slightly increased by 20 bps (basis points) quarter over quarter, due to moderate positive net absorption and a sizeable vacant construction delivery (138,450 sq. ft.) at MCA Business Center in Southwest Riverside. 67.6 percent of the current under construction number is expected to deliver by the year end, vacancy may bump up slightly despite the positive absorption.

Industrial construction is at a post-recession high, however it only represents 1.8 percent of the current rentable base—  even if all product delivered vacant, the total vacancy rate would still be below 6.0 percent indicating developers and financial backers are sensitive to oversupply. 67.6 percent of the current construction is expected to be deliver by year end, which will give some relief to the tight market, however most of it is warehouse product.

Under construction activity was at a post-recession high in Q2 2018, with 41 buildings totaling 3,503,817 sq. ft. countywide. Eight new buildings, totaling 677,486 sq. ft., broke ground in Q2 2018, most notably, three warehouse buildings totaling 277,793 sq. ft. that are in Phase two of the Pacific Coast Collection in Oceanside. Four buildings, totaling 463,632 sq. ft., delivered with all but one tenant in place. General Atomics preleased two of the remaining Ridgeview Business Park delivered buildings in Poway for 80,500 sq. ft. and 71,429 sq. ft.

“The industrial market remains tight and leasing activity is strong, particularly from defense contractors,” said Bill Dolan, senior vice president of CBRE San Diego. “Net absorption was positive, vacancy and availability rates remain at historically low levels, and there is pent up demand for functional, class A industrial buildings. While construction activity may appear high with 3.5 million square feet currently being built, CBRE is tracking over 10 million square feet of current demand.  The new construction will be a welcome relief for a lot of this demand.”

Light industrial/manufacturing product, which represents 35.9 percent of the total industrial base, closed Q2 at 2.5 percent vacancy, the lowest of any subtype. Only 2.3 percent of the construction pipeline is light industrial product, signifying that owners will have to think of creative conversions to appease manufacturing type users. Considering manufacturers added 4,600 jobsin Q2, the lack of product to keep up with the industry growth may become an issue for relocating tenants and in turn diminish demand.

After reaching all-time highs in Q1 2018, both high and low-finish average asking rates declined quarter over quarter to $1.36 NNN (-4.2 percent) and $0.90 (-1.0percent), respectively. The larger decrease in high-finish rates was mostly due to a handful of sizeable blocks of lower quality

space available in Sorrento Mesa and San Marcos asking below average rates. Low-finish rates, though down in Q2, remained near the post-recession high of $0.91 NNN set in Q1 2018. Low-finish has showed little signs of slowing down, with rates 4.7 percent higher than a year ago.

Industrial-using employers added 13,000 jobs (+4.0 percent) year over year in Q2 2018, accounting for 40 percent of jobs added. Construction employers led the way, adding 5,200 jobs (+6.6 percent), a sign that building is expected to continue.

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