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Surging Demand Leaves Little Supply in San Diego Industrial Market

San Diego CA County— According to CBRE’s research, the San Diego industrial market had an astounding 2015, breaking many year-to-date records and leaving hardly any available space on the market.

The industrial market has quickly become constrained with high owner/user demand and very little available space for lease. Historically inexpensive money is available at low interest rates and many investment buyers are in the market, increasingly escalating sale prices. Consistent demand since the beginning of 2013 has halved San Diego’s overall vacancy from 8.6 percent in Q1 2013 to 4.3 percent this quarter. This surging demand, coupled with decreasing vacancy and rising rents, has made new construction feasible and spurred speculative projects from Murphy Development in Otay Mesa and Arnel Development in Carlsbad, as well as other projects in the pipeline for 2016.

This was the 14th consecutive quarter of decreasing vacancy, falling to 4.3 percent. The largest decreases were in Central San Diego and North County; each saw overall vacancy decrease 20 basis points (bps) from Q3 2015 to 5.1 percent and 3.8 percent, respectively. Southwest Riverside and East County share the lowest overall vacancy with 2.3 percent.

“Led by the low finish sector, the San Diego industrial market finished 2015 by posting another strong quarterly performance,” said Sean Williams, industrial expert for CBRE in the San Diego region. “Tenant demand for leased space continues to outpace the supply particularly relating to the warehouse segment. The forecast for 2016 predicts more of the same, yet with slower paced absorption and rent growth due to tight availability.”

While industrial net absorption lagged this quarter, it nonetheless posted positive net absorption of 291,031 square feet. This net absorption figure can be attributed to very little available space for prospective tenants to lease. The year ended with the highest-year-to-date net absorption figure since 2006, posting 3,519,916 square feet. North County accounted for about 40 percent of all year-to-date net absorption, with nearly 1.4 million square feet. South San Diego and Southwest Riverside were the only regions, this quarter, to post negative net absorption, but are still positive year-to-date.

More than 120 industrial sales occurred in 2015, the highest number since 2006. Both the delivery and new construction in the quarter are speculative, showing that rents and vacancy have finally attained levels that make this type of development feasible.

According to CBRE Econometric Advisors (CBRE EA), San Diego’s construction industry had the highest growth rate of all sectors; it grew 4.8 percent in the last 12 months. CBRE EA also gauges industrial employment by tracking certain industries that fall into the manufacturing and distribution sectors. These jobs account for more than 150,000 of the 1.39 million jobs in San Diego and are expected to decline by an annual growth rate of (0.4 percent) over the next five years.

Construction activity increased for the fifth consecutive quarter as Arnel Development broke ground on four Business Park R&D buildings in Palomar Forum in Carlsbad, totaling 119,797 square feet. The only delivery this quarter was by Burke Real Estate, which delivered an 81,500-square-foot speculative building at the Raceway Business Center in Carlsbad. It was delivered approximately 50 percent leased; there is still 38,000 square feet of space available. Construction activity should continue in 2016 due to surging industrial demand and a pipeline of proposed buildings.

To view the full San Diego Industrial Market report for the fourth quarter, 2015, click [here]