Home / Business / RealEstate / Flight to New Construction, Early Renewals Apparent in San Diego’s Industrial Market

Flight to New Construction, Early Renewals Apparent in San Diego’s Industrial Market

San Diego County CA— According to CBRE’s research, the San Diego industrial market continued to benefit from new construction deliveries this quarter.  The majority of the delivers came from Illumina’s newest lab facility totaling 295,837 square feet.  Murphy Development also delivered a 121,970-square-foot warehouse in Otay Mesa fully vacant. According to CBRE Econometric Advisors (CBRE EA), San Diego’s construction industry had the highest growth rate of all sectors increasing 8.7 percent in the last 12 months, they also predict construction will remain among the largest growth sectors over the next 12 months.

The continued delivery of new construction shows confidence from developers and the strength of the San Diego industrial market. Flight to new construction has become apparent for tenants, as new buildings are being delivered fully leased and have been keeping net absorption positive for the past two quarters. CBRE EA forecasts San Diego industrial rates to steadily increase 11.3 percent by Q4 2021, while also forecasting vacancy to increase 2.6 percent in the same time period. The current market fundamentals are compelling tenants to renew earlier and earlier, and landlords are pursuing longer-term leases.

This quarter, San Diego industrial asking rates increased $0.04 to $1.20 triple net (NNN). The sustained increases in asking rates point to the high demand in the industrial market. Light industrial showed the largest increase of 5.3 percent to $1.00 NNN quarter-over-quarter. This was the first time since 2008 that light industrial product had an average asking rate of $1.00 NNN. Every subtype except business parks had a higher rate in Q2 2016 than in Q1 2008.

The total dollar amount of industrial sales was in line with previous quarters. The largest single building sale of the quarter was General Atomics’ purchase of a 127,185-square-foot building in Poway for $17.7 million.

Although net absorption was positive, San Diego’s total vacancy increased 10 basis points to 4.5 percent. This divergence was due to a combination of the fully absorbed buildings upon completion and the new Siempre Viva Business Park warehouse that came online fully vacant. Total vacancy increased because the construction deliveries outpaced net absorption.

Following suit to Q1 2016, the fully-leased deliveries this quarter created 339,921 square feet of positive net absorption. Both South San Diego and East County had approximately (120,000) square feet of negative net absorption, while all other regions had positive net absorption. R&D product had the best quarter out of all subtypes, posting 199,726 square feet of positive net absorption, the highest number since Q1 2015.

“The South County industrial market remains strong with continued tenant demand, limited space options and rising lease rates,” said Erik Parker, vice president of CBRE’s San Diego region.  “Specifically, Otay Mesa has dropped to single digit vacancy, a trend fueled in part by new tenant migration into the market. As a result, two new buildings will be delivered this year, the first speculative construction since the completion of the five-building Britannia Industrial Park project in 2008.”

There was 461,891 square feet of construction deliveries this quarter. The majority of this was from Illumina’s newest lab facility totaling 295,837 square feet. Murphy Development also delivered a 121,970-square-foot warehouse in the Siempre Viva Business Park in Otay Mesa. There is still nearly 1 million square feet of industrial construction activity across the county representing all product types except R&D and business park industrial. Lab has the most square-footage under construction with nearly 380,000 square feet all in UTC.

Click here for the full report.