The San Diego industrial market is still thriving under sunny skies. The 146-million-square-foot industrial base is more than 95 percent occupied. Businesses continue to gobble up space even though rents have grown 6 percent to 8 percent annually since 2015. Though industrial markets around the country continue to do well thanks to a rapidly expanding logistics sector, San Diego’s industrial growth is broader based. Major contributions come from the defense, tech, electronics, cross-border commerce and biotech sectors.
San Diego has several large submarkets, each with its own set of opportunities and challenges. South County, which includes Otay Mesa, has seen the strongest rent growth during the current economic recovery. Since the beginning of 2018, more than 591,000 square feet of state-of-the-art distribution space has been completed, with all but 45,000 square feet fully leased up. Recent transactions in Otay include a 198,000-square-foot lease to Zucarmex and the 174,000-square-foot expansion of US Joiner Trident Marine. The vacancy rate for South County stands at 4.33 percent, slightly under the countywide rate.
Randy LaChance, Voit Real Estate Services
Vacancy in North County is running somewhat higher at 6.72 percent. This is mainly due to recent deliveries in Carlsbad. A little more than 2.2 million square feet of new space has been delivered in North County since the beginning of 2018. However, nearly half of that still remains vacant. Land is much more expensive in North County, which has forced developers to build a new product labeled “creative industrial” or “HQ industrial” in an effort to achieve higher rents. These distribution buildings have a higher office build-out than traditional logistic spaces with a mezzanine office area and more exterior amenities. Though the lease up of new inventory has gone slower than expected, if the current rate of net absorption continues, these buildings should fill up in 2020.
Central County is the tightest of the San Diego submarkets, with a vacancy rate of just 2.78 percent. As a result, businesses are having trouble finding quality space to lease or buy. Tight supply means higher rents — and Central County’s are highest at an average of $1.27 per square foot. This is compared to just $0.81 in South County and $0.97 in North County. With virtually no vacant land in Central County, new construction has been limited. These market dynamics are creating opportunities to redevelop older projects, though. LBA Realty redeveloped an older engineering building in Kearny Mesa last year that included a 100,000-square-foot, state-of-the-art distribution space that was successfully leased to Tire Warehouse. Lincoln Property Company recently acquired a 21-acre site with older buildings from Cubic Corporation in Kearny Mesa. Initial plans for the site include scraping the existing buildings and constructing a state-of-the-art distribution building.
Investors of all types keep San Diego at the top of their lists. Institutional investors like the broad-based economy, as well as the region’s reputation as a great place to live and work. In 2018, Blackstone acquired an industrial portfolio that included more than 1 million square feet for $170 million, the largest industrial property sale in San Diego history.
— By Randy LaChance, senior vice president, Voit Real Estate Services. This article first appeared in the September 2019 issue of Western Real Estate Business magazine.