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San Diego Industrial Market Rejuvenated in Q3

Market Achieves 650,000 SF Occupancy Growth, Vacancy Dips to 15-Year Low 4.8%

San Diego County CA— Following a sluggish second quarter, characterized by local experts as an ‘early summer’, San Diego’s industrial market was rejuvenated in the third quarter with nearly 650,000 square feet (sf) of occupancy growth, according to Cushman & Wakefield’s newly released Q3 2017 market report.

Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said, “With a slim loss in occupancy, the second quarter put a pause on what had been 23 consecutive quarters (Q3 11 through Q1 17) of industrial expansion; although, with a healthy first quarter occupancy was still net positive at midyear. Given market fundamentals remain strong in the industrial sector, we fully expected the third quarter to rebound strong.”

Ms. Campion further added to the positive trends brought in the third quarter, “Economic activity in the manufacturing sector expanded in September, with an ISM index reading of 60.8%, an increase of 2 percentage points from the August reading of 58.8%. Last time the index was at 60.8% high was in January 2004. The overall economy grew for the 100th consecutive month in the U.S. The headlines behind the September manufacturing ISM report were: ‘New orders, production, backlog of orders and employment continue growing, supplier deliveries slowing, raw materials inventories growing, customers’ inventories too low and prices increasing at a faster rate.’ Of the 18 manufacturing industries, 17 reported growth in September.

Year-to-date, San Diego’s industrial market has tallied over 709,000 sf of occupancy growth, now pacing ahead of 2016 though still a great distance from the ultra-robust levels in 2012 through 2015 which collectively averaged approximately 2.5 msf of growth per year– each recording over 2.3 msf annually.

At the close of the third quarter, overall industrial vacancy in the San Diego marketplace stood at 4.8%, a 30 basis-point (bps) decrease from both the previous quarter as well as a year ago. Ms. Campion noted, “Overall vacancy has been steadily hovering the 5% mark for the last nine quarters, indicating consistent demand for industrial product countywide. Vacancy now stands at the lowest level we have ever tracked on record or over a 15 year-period.”

During the third quarter the strongest occupancy growth submarkets were Chula Vista (+380K sf), Miramar (+126K sf), Sorrento Mesa (+112K sf), and Poway (+86K sf). In contrast, Otay Mesa experienced the deepest occupancy loss with negative 129,000 sf. The majority of its loss, however, can be attributed to a single large block of space due to Panasonic (formerly Sanyo) having sold back its San Diego Business Park campus to the project’s original developer/owner, Murphy Development Company (MDC). While remaining in operation in a portion of its campus, Panasonic gave back approximately 209,000 sf to the landlord. MDC plans to invest $15 million on upgrades and market the space for lease as The Campus at San Diego Business Park.

The Cushman & Wakefield report also shared that four buildings totaling approximately 319,000 sf were delivered in the third quarter, bringing year-to-date deliveries to nearly one-half million square feet. Supporting a targeted trend of development in Carlsbad, Regent Properties completed the first phase of renovations at Atlas at Carlsbad, part of a repositioning of the office campus, and Badiee Development completed 55,000 sf within the Carlsbad Raceway Business Park. These projects were constructed on a speculative basis and delivered 100% vacant. There were also a pair of notable buildings that were 100% preleased upon completion in the third quarter and which also ranked among the largest move-ins. General Atomics’ build-to-suit in Poway resulted in 82,640 sf positive net absorption, and a 44,084-sf building in Otay Mesa delivered fully pre-leased to MSE and ProTrans International, Inc.

Bryce Aberg, Executive Director in San Diego, said, “With well over half of our industrial inventory built pre-1990 and just 3% since 2010, new development remains a major focal point of San Diego’s industrial landscape as well as its vitality. And while new deliveries have been regular thus far in 2017 there is currently nearly 2.4 million square feet (msf) currently under construction in the region, the highest level in 10 years (2.7 msf in Q1 2007).”

He added, “Representing 40% of the total inventory currently under construction, Carlsbad continues to experience the highest level of construction activity due to its proximate location to a large skilled employee base and availability of developable land.”

Mr. Aberg noted, “Many projects across the county officially broke ground during the third quarter. Redevelopment and new construction of the BioLegend campus in Miramar commenced. Totaling 235,000 sf, the project scope includes 128,000 sf of new space and three buildings that will be completely redeveloped to accommodate the life sciences company. A pedestrian bridge will connect lab space to administrative buildings and 250,000 sf of amenities, such as, a fitness center, locker room, kitchen, wellness bar, yoga room, game room and outdoor spaces.

Aric Starck, Executive Managing Director with Cushman & Wakefield in San Diego, weighed in, “Developer RAF Pacifica also started development on several North County projects, including the 277,000-sf Distribute and 144,000-sf Create projects in Carlsbad, and 219,000-sf Production in San Marcos. Among other notable projects breaking ground in the third quarter were the 302,500-sf Ridgeview Business Park in Poway, 267,000-sf IPT Otay Logistics Park in Otay Mesa, and 125,000-sf at Pacific Coast Collection in Oceanside.

He added, “San Diego’s new construction levels at the end of 2017 will be consistent with its 10-year average of 523,000 sf. However, 2018 looks to tower this average with over 2 msf scheduled to be delivered next year, roughly 25% being built on a build-to-suit basis. And with the remaining speculative space yet to have any commitments in place, though interest is apparent, we’re likely to see an uptick in vacancy over the next 12 months.”
CLICK HERE to access Q3 2017 San Diego MarketBeat Industrial Report summary.CLICK HERE to access Q3 2017 San Diego Industrial Historical Snapshot + submarket stats.
CLICK HERE to access Q3 2017 San Diego Industrial Infographic.