SAN DIEGO—The Otay Mesa submarket offers the industrial sector proximity to the US/Mexico border, newer product with better functionality and available land for development at significantly lower costs compared to other San Diego submarkets, JLL's SVP Ryan Grove and senior associate Joe Anderson tell GlobeSt.com. As we recently reported, JLL's capital-markets team has sold, on behalf of Clarion Partners, International Business Center, a 517,207-square-foot, seven-building industrial park with a 9.2-acre truck yard located in Otay Mesa to a private real estate investor; JLL was also awarded the leasing assignment for the property. Given the increased activity in this submarket recently, we spoke exclusively with Grove and Anderson about the industrial sector there and how it compares to other San Diego industrial submarkets.

GlobeSt.com: What's different about the Otay/border-area industrial market as compared to other industrial markets in the region?

Grove and Anderson: The primary differentiators separating Otay Mesa from other markets in the county are proximity to the US/Mexico border, generally newer product with better functionality, available land for future development and significantly lower sale and lease costs in comparison to central markets. 

Of the 26 industrial submarkets that JLL tracks in San Diego County, Otay Mesa, which has approximately 14.7 million square feet of industrial product, is the second-largest submarket and represents just under 10% of all industrial product in the county. Its location on the US/Mexico border makes Otay Mesa the primary industrial submarket in San Diego County providing freight access to and from Mexico via the Otay Mesa Port of Entry. Proximity to the border is key, since many tenants in this submarket do business in Mexico and may have operations on both sides of the border.

Otay Mesa is also experiencing a considerable amount of infrastructure improvements including but not limited to:

• The now-completed extension of SF-905 all the way to the border;
• The current construction of SR-11, which will connect SR-905 to the proposed new border crossing called the Otay Mesa East Port of Entry;
• The current construction of the SR-125 to SR-905 connector; and
• The Cross Border Express, which will be an enclosed pedestrian sky bridge that spans the US/Mexico border, connecting a new passenger building in Otay Mesa directly to the Tijuana airport. 

All of these infrastructure changes continue to help to make Otay Mesa more attractive to companies. 

The majority of the industrial submarkets in San Diego County are land constrained and can't accommodate significant new industrial construction. This is in contrast to Otay Mesa, which not only has much developable land, but is also currently undergoing speculative construction of industrial product. We've found that it's useful to have a cross-border team when brokering space in Otay Mesa, and we worked closely with our JLL team office in Tijuana when we were leasing up part of a 1.2-million-square-foot industrial property. This collaboration made it much easier to market to tenants on both sides of the border.

GlobeSt.com: What kinds of tenants are occupying industrial space in this submarket?

Grove and Anderson: Otay Mesa is home to a wide range of tenants, but most common are third-party logistics firms providing outsourced distribution warehousing and storage for businesses that are importing and exporting. Also, Tijuana is emerging as a healthcare-manufacturing leader. For example, Flextronics and CareFusion (recently acquired by Becton Dickinson), among other companies, have operations on both sides of the border.

GlobeSt.com: What are the prospects for ground-up development in this submarket in the next two to five years?

Grove and Anderson: The prospects for ground-up development are very healthy in Otay Mesa. We're currently seeing the first spec development in Otay Mesa in eight years, with Murphy Development's 122,000-square-foot, class-A warehouse/distribution building under construction in the Siempre Viva Business Park. Absorption of bigger blocks of space—100,000 square feet and up—has created a backlog of demand, with few existing large blocks of space left. As the last vacancies get leased, we'll likely see more developers willing to go spec. Although several other industrial submarkets in San Diego have some speculative development of industrial properties taking place, such as North County, Otay Mesa provides that critical proximity to the border, and with the extension of SR-905, Otay Mesa provides easy access to the central markets.

Activity in Otay Mesa's industrial market is and will continue to be buoyed by the rise of near-shoring in the manufacturing sector. Labor rates are up in China, so Mexico has become a better option because the delta between labor rates of the two countries is not as wide as it used to be. For many US-based firms, a trip across the US/Mexico border, possibly in the same time zone, is much more attractive than a trans-Pacific trip. After a sharp decline in 2009, imports and exports at the Otay point of entry have increased steadily since, with a year-over-year increase in 2014 of 8.8% for exports and 8.5% for imports. The increase in truckload containers during that same year-over-year period reached 9.5%.

GlobeSt.com: How do lease rates and vacancy rates in this submarket compare to nearby submarkets?

Grove and Anderson: Otay Mesa has always lagged the central San Diego submarkets in vacancy and lease rates. The single-digit vacancy rate is the lowest it's been in nearly 20 years. Lease rates continue to rise, although still remain well below rates for warehouse space in the central markets of San Diego. As the vacancy rates tighten, we expect to see the lease rates rise even more. This will be especially impactful for tenants who have been in Otay for a while and are now renewing. Chances are that they enjoyed recession-era deals when they last renewed their leases.