Cushman & Wakefield Releases New Q2 Report, plus Five Fast Facts Infographic
San Diego CA— Cushman & Wakefield’s research department has released their second quarter 2019 industrial market report for San Diego. Below are the key findings from this report plus local expert commentary:
OCCUPANCY THRUSTS UP, VACANCY FALLS
San Diego’s industrial market racked up 706,000 square feet (sf) of positive net absorption in the second quarter, which after virtually flat occupancy growth to start the year placed midyear growth at nearly 700,000 sf. The skyrocketing Q2 figure ranked well above the five-year quarterly growth average of 423,000 sf—also considered a strong level—and was also the highest quarterly growth in nearly a year. With six months still to go, 2019 is on pace to finish midway between 2016 and 2017’s sub 1 million square feet (msf) of growth each and 2018’s lofty 2 msf growth.
Bryce Aberg, Executive Managing Director with Cushman & Wakefield, said “New construction was a key source of growth activity, with nearly half of the second quarter net absorption in new developments. The largest occupancy stemmed from the completion of BioLegend’s new headquarters, a 235,000-sf R&D campus in Miramar. Other key growth contributors included a new 51,000-sf project purchased by Orange Circle Studio in Oceanside and a 37,000-sf build-to-suit for Easihair Pro in Carlsbad.”
Aberg continued, “Notably, MagnaFlow purchased and occupied half of a 125,000-sf building that was delivered just last year at Pacific Coast Collection in Oceanside, leasing the other half to Weiland Doors, while the next largest move-in also involving a newer project delivered last year as Tire’s Warehouse occupied 106,000 sf at 4400 Ruffin Rd. in Kearny Mesa.”
Positively, the report indicated all three sub-counties achieved occupancy growth during the second quarter: Central County (332,200 sf), South County (227,800 sf), and North County (145,500 sf).
Jolanta Campion, Cushman & Wakefield’s Director of Research for San Diego, said, “In terms of submarkets, Otay Mesa really stood out in the second quarter with significant positive absorption due to several large occupancies. R.L. Jones (95,000 sf), kSARIA (75,000 sf), and YRC Freight (61,000 sf) all moved into new space this quarter.”
Regarding vacancies, Campion added, “Still hovering just above 5.0%, overall San Diego countywide industrial vacancy was a healthy 5.3% at mid-year 2019. The sector is tightest for incubator multi-tenant (IMT) space with 4.3% vacancy, unchanged from a year ago. Manufacturing vacancy was 4.8% versus 3.3% a year ago. Distribution space was 5.2%, up 80 bps from last year. R&D vacancy has decreased sizably by 170 bps over the past year to 7.2% due to several new mid-to-large sized occupancies.”
NEW CONSTRUCTION KEEPS ON TRUCKIN’
There are 18 industrial buildings totaling over 1.4 msf currently under construction. During the second quarter, approximately 589,000 sf (12 buildings) of new projects received their Certificate of Occupancy, while another 438,000 SF is expected to complete by the end of 2019—of which 17% is pre-leased.
Dennis Visser, Managing Director with Cushman & Wakefield, said, “Although the second quarter of 2019 marked the third consecutive quarter for total industrial vacancy to remain above the 5.0% mark, this is not at all surprising given that 2.7 million square feet of industrial product has delivered over just the past year, a level four times higher than the 10-year annual completion average of 710,400 sf. In fact, maintaining in the 5% range is in and of itself a positive feat exemplifying the ongoing demand for space in San Diego.”
Visser added, “With 56% of industrial space countywide built before 1990 and just 4% built in 2010 and after, emphasis on new development (or even renovated product) has remained critical for owners in San Diego to be able to fulfill the needs of today’s industrial users—and they are answering the bell.”
The average asking rent for all industrial product types combined was $1.13 per square foot (psf) per month on a triple net basis, up from $1.10 psf last quarter (+2.7%) and $1.06 psf a year ago (+6.6%). Rents are now up 23% since the end of the last recession, when they stood at $0.92 in mid 2009.
Ryan Spradling, Senior Director with Cushman & Wakefield, said, “The increase in rents remains primarily driven by the strong demand for modern and specialized space for industrial users. In response, we are not only seeing asking rental rates increase as a result of the new construction buildings that command the highest rental rates, but we are also seeing rents increase in existing facilities, especially for better quality space. In a sense, when it comes to rents, with supply still relatively low, new construction is also helping lift most other boats.”
INVESTORS STILL HOT ON SAN DIEGO
Industrial sales in San Diego were plentiful in the second quarter. According to Real Capital Analytics, approximately $337 million across all property sizes traded, a 70% increase compared to the first quarter. At midyear 2019, sales volume stood at $535M, an 11% increase from the $483M traded during the first half of 2018.
Bryce Aberg said, “San Diego’s industrial market fundamentals remain strong which continues to propel demand from investors seeking desirable acquisition opportunities, and for those wanting to diversify and bolster their portfolios. Private buyers accounted for 39% of buying activity as of mid-2019 (vs. 50% in 2018), followed by institutional (30%) and REITs (25%).”
Spradling said, “We still have 3.1 msf of active industrial tenant requirements in the market over the next 24 months. Keeping balance, a fair amount of these users may continue to align with the new product coming online. As such, despite the hefty levels of new supply, we expect vacancy to remain healthy for the foreseeable future, with occupancy maintaining a growth trajectory.”
Campion noted, “Still boding well for the industrial marketplace is that economic activity in the manufacturing sector expanded once again in June, with an ISM index reading of 51.7% compared to 52.1% in May—an ISM reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting.”
Click links below to download Q2 2019 reports
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