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San Diego Industrial Market Sees Rare Blip Amidst Long, Strong Growth Trend According to Cushman & Wakefield Report

Vacancy and Occupancy Flat, Construction Up to Start 2019

San Diego CA— On the heels of achieving a staggering 2 million square feet (msf) of annual occupancy growth in 2018, San Diego industrial market growth stepped off to a flat start in the first quarter of 2019, reports Cushman & Wakefield. In total, the market reported a minimal loss of less than 18,000 sf countywide, though it is expected for growth to resurge soon ahead. Industrial vacancy was also flat, holding its sturdy position in the mid-5% range, despite an ongoing influx of new construction deliveries—a strong and vital source for growth activity the past several years.

Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said, “A slow yearly beginning is not all that uncharacteristic. For example, 2018 also began sluggish but went on to see tremendous industrial growth the rest of the way, even doubling the net levels of each 2017 and 2016. That is not to say 2019 will match last year’s performance, but we fully anticipate a return into growth mode as the year progresses.”

She added, “Q1 2019 marked just the second quarter in nearly eight years to fall into negative growth territory—the other being nearly two years ago in Q2 2017. For a very long time, San Diego has experienced strong, stable industrial growth, showing positive in 29 out of the last 31 quarters.”

Observing the different San Diego sub-regions, tenants absorbed 255,000 sf in South County, but returned 165,000 sf to North County and another 107,000 sf to Central County during the opening quarter. The report identified a few notable vacates, but also revealed several notable move-ins or net market expansions.

In the first quarter of 2019, overall vacancy held firm at 5.4%, unchanged from last quarter though up a moderate 60 basis points from a year ago at 4.8%. Within the overall figure, manufacturing space now stands at 4.5% vacant countywide versus 2.8% a year ago. Distribution space is now at 5.6%, up 100 bps from a year ago. Meanwhile, R&D vacancy has decreased further into single digits by 160 bps to 7.7% during the same period.

Bryce Aberg, SIOR, Executive Managing Director with Cushman & Wakefield in San Diego, said, “Although Q1 was the second consecutive quarter with vacancy above the 5% line, this was to be expected as 3.3 million square feet (msf) of new product has delivered over the last year, a level well over four times our 10-year completion average of 724,000 sf.” He added, “The manufacturing and distribution sectors accounted for 21% and 67% of this recent delivered square footage, respectively, so it is no surprise that they would see such bumps in vacancy the past year. The fact the market has withstood such a rush of new development with overall vacancy holding in the 5% range is a testament to the strong demand here.”

The report finds the average asking rent for all industrial product types was $1.10 per square foot (psf) per month on a triple net basis, a minor dip from $1.11 psf last quarter (-0.9%), though up from $1.04 psf a year ago (+5.8%). Overall rents are currently up 20% since the Great Recession.

Aberg said, “Rent growth the last several years has been heavily influenced by the demand for and availability of modern and specialized space for industrial users. In response, we’re not only seeing asking rental rates increase for existing buildings but also in new construction that command the highest rents. Overall rents should remain strong looking forward, especially as more new, high grade product is introduced.”

For many reasons, new construction remains a critical segment within the industry. During the first quarter, over 397,000 sf in four newly delivered industrial buildings received their Certificate of Occupancy, just 14% being pre-leased. Two of the buildings totaling 296,000 sf at the Pacific Vista Commerce Center in Carlsbad were delivered fully available. An additional 1.1 msf or more is expected to be completed in 2019, of which 28% is pre-leased, while the firm is tracking a total of 2 msf of industrial product currently under construction.

Aric Starck, Vice Chair with Cushman & Wakefield in San Diego said, “More than half of our leasable industrial building inventory in San Diego continues to lack modern design features for today’s tenants who require high-functioning and efficiently designed product. This trend has led to an increase in speculative construction as developers and landlords remain bullish on their prospects—especially as new construction has been a prime source of leasing activity. Of the total 2 msf currently underway, 81% or 1.6 msf is being built on a speculative basis, while developers continue to break ground on new projects.

“We are currently tracking 2.6 msf of active tenant requirements in the industrial sector, with approximately half of that space in the earliest stages of pursuit. Some of this demand should sync with the ongoing new product delivery,” Starck added. “As direct industrial vacancy remains historically low at just 4.4% and demand remains solid, the increase in new construction should continue to cause upticks in our vacancy and availability in coming quarters, though still hovering at a healthy equilibrium with demand.”

Aberg concluded, “Continuing to bode well for the industrial marketplace is that economic activity in the manufacturing sector expanded in March, with an ISM index reading of 55.3% compared to 54.2% in February. An ISM reading above 50% indicates that the manufacturing economy is generally expanding. The overall economy grew for the 119th consecutive month in the U.S. Of the 18 manufacturing industries, 16 reported growth in March of 2019.”
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