Year Ends with Tracked Record-Low Vacancy Below 5.0%
San Diego County CA— After a relatively flat first half of the year, San Diego’s industrial market proved resilient in the second half of 2017 achieving more than 930,000 square feet (sf) of occupancy growth during July to December, according to Cushman & Wakefield’s newly released Q4 2017 market report. Overall, 2017 finished just shy of the 1 million square foot mark with 991,000 sf of positive net absorption as the regained momentum pushed countywide vacancy to below 5% by year’s end to 4.8%.
Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said, “The year began slow but the third quarter really got things back on track and into high gear, and the year was able to finish in the strong manner that we all expected. Vacancy now stands at its lowest point we have ever tracked on record or over a 15 year-period.”
Ms. Campion added, “Occupancy growth in 2017 has certainly decelerated from the superior levels in 2012 through 2015 which collectively averaged approximately 2.5 msf of growth per year. However, with supply having constricted at sub 5% vacancy, for this market to achieve another nearly 1 msf of annual growth is a testament to its resiliency and desirability. Further, 2017 still outperformed 2016’s level of occupancy growth by over 30%.”
She also pointed out that “Economic activity in the manufacturing sector expanded in December, with an ISM index reading of 59.7%, an increase of 1.5 percentage points from the November reading of 58.2%. (A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting). The overall economy grew for the 103rd consecutive month in the U.S. Of the 18 manufacturing industries, 16 reported growth in December.”
Bryce Aberg, Executive Director in San Diego, said, “With over 239,200 sf of positive absorption, Poway was the strongest growth submarket in the fourth quarter. The bulk of the gain was a result of General Atomics’ purchase of a multi-tenant building in which it took occupancy of 192,000-sf. Another active submarket this quarter was East County with 134,000 sf of positive absorption. In Santee, a city within East County, aluminum glazing system manufacturer Vision Systems took occupancy of its new 89,000-sf build-to-suit (BTS) manufacturing headquarters. The project, which was approved by the city of Santee in February 2016, was delivered in Q4 2017. Another notable move-in this quarter was Atlas Freight’s expansion into nearly 100,000 sf in Otay Mesa within a space formerly occupied by Factory 2-U.”
He added, “While other parts of the I-15 Corridor experienced large swings of positive absorption, Rancho Bernardo saw nearly 210,000 sf of negative absorption in the fourth quarter due to Hewlett Packard vacating their former San Diego campus and Iso Nano terminating their lease early, moving out of 65,800 sf. In Carmel Mountain Ranch, Carvin Audio moved out of 82,000 sf at a building they had owned but sold to an investor in 2016.”
The Cushman & Wakefield report revealed that the year-end average asking rent for all industrial product types combined was $1.03 psf per month on a NNN basis compared to $0.99 psf in the prior quarter and $1.01 psf a year ago. The current rate of $1.03 psf NNN marks the highest level the firm has tracked in 15 years while marking an increase of 15.7% since the end of the last recession ($0.89 psf in 2009).
Mr. Aberg elaborated, “Year-over-year, average rent for manufacturing classed space has increased 9.4% to $0.93 psf per month, and rent for incubator multi-tenant space has increased 7.8% to $1.11 psf per month. This rising trend is driven by the demand for modern and specialized space for manufacturers and small industrial users. In response, we are not only seeing asking rental rates increase but also an increasing trend of renovations of older product to make them more appealing to tenants.”
New and redevelopment is also another vital segment of the marketplace being closely monitored by the report as well as the brokerage community. Several projects across the county officially broke ground during Q4 2017, including Ryan Companies 411,000-sf Pacific Vista Commerce Center in Carlsbad Oaks North. Also breaking ground was the 212,000-sf Exeter Distribution Center in Escondido, a BTS project for Veritiv. Badiee Development is developing the project and expects completion in summer of 2018. Construction of San Diego Hat Company’s new 83,000-sf headquarters began within Carlsbad Oaks North, designed and developed by RAF Pacifica. The project is expected to be completed in the second half of 2018. RAF Pacifica is the largest spec developer in the county with over 818,000 sf of industrial product under construction, mostly in North County.
Aric Starck, Executive Managing Director with Cushman & Wakefield in San Diego, said, “There are currently 29 industrial buildings totaling over 3.1 msf under construction, the highest level in 12 years (3.6 msf in Q4 2006). However, with a low countywide direct vacancy of 3.9%, it is unlikely that this level will satisfy demand for new, functional space. According to our calculations, 57% of industrial space countywide was built before 1990 and barely 3.0% of space was built after 2010. This means that more than half of leasable industrial buildings in San Diego lack modern design features for today’s demanding tenants who require high-functioning and efficiently designed product. This trend has led to an increase in speculative construction as developers and landlords become more bullish on their prospect of leasing new space. Of the space that is currently under construction, 73% (or 2.3 msf) is speculative development.”
Mr. Starck said in looking forward, “It is difficult to tour around San Diego and not see a new industrial project underway. With the flurry of construction activity, we expect nearly 2.9 msf of new, state-of-the-art industrial space to be delivered to the market in 2018. With just 29% of 2018’s expected deliveries pre-leased at this time, we anticipate a momentary uptick in vacancy as those spec projects are delivered vacant. However, we do not expect this new, well-equipped space to be vacant long due to fervent demand. We are currently tracking 2.8 msf of active tenant requirements for space over the next 24 months, but while not all of this square footage will transact in the short term, many could align with the delivery of this new construction.”
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