More Reasons for South County's Rise

Parker: “I think lease rates are going to be impacted by rising costs in construction and that developers like Mike Murphy will need to get a little higher asking rate to account for rising costs.”

SAN DIEGO—The City is providing supporting infrastructure for users in the Otay Mesa submarket, and industrial tenants could save more than 46% on their rent by choosing it over Central San Diego, CBRE VP Erik Parker tells GlobeSt.com. According to CBRE’s research, the San Diego industrial market continued to benefit from new construction deliveries this quarter. The majority of the deliveries came from Illumina ‘s newest lab facility totaling 295,837 square feet. Murphy Development also delivered a 121,970-square-foot warehouse in Otay Mesa fully vacant. According to CBRE Econometric Advisors , San Diego’s construction industry had the highest growth rate of all sectors, increasing 8.7% in the last 12 months; the group also predicts construction will remain among the largest growth sectors over the next 12 months. We spoke exclusively with Parker about the rise of this South County submarket, how deliveries will affect vacancy and lease rates there and other areas in the county for industrial construction . GlobeSt.com: Where do you see industrial construction heading in South County? Parker: I see a continued push for developers to continue on a speculative basis down there, and I’d say most notably Mike Murphy’s company Murphy Development is one of the most active developers in that market right now. He’s really leading the charge in that market currently. GlobeSt.com: What effect will deliveries will have on vacancy and lease rates in this submarket? Parker: This year, Murphy delivered a 120,000-square-foot single building. Otay Mesa’s total industrial base of as of Q2 was about 15.3 million square feet about. When he delivers a 120,000-square-foot vacant building to the market, it will increase vacancy by about another percentage point. Vacancy rates are going to creep up—about 1% for every 150,000 square feet if buildings are being delivered vacant. I think lease rates are going to be impacted by rising costs in construction and that developers like Mike Murphy will need to get a little higher asking rate to account for rising costs. Between the rising costs of steel, city fees, the storm-water regulations required by the state and, once the buildings are done and developers start building office space in those buildings, they will be subject to Title 24 , which is also adding to the final costs of the building. So, lease rates will have to creep up in order for it to make sense for developers to continue to build. GlobeSt.com: In which other San Diego submarkets do you expect to see industrial construction? Parker: I expect to see and am seeing today development in North County—more specifically, in Carlsbad. That submarket market has about 268,000 square feet under construction right now for two different projects. GlobeSt.com: What else should our readers know about South County’s industrial market? Parker: South County is a market that is changing for the better. We have very high-quality buildings that meet all the needs of today’s users including high-clear buildings, good truck-turning radius and ESFR sprinkler systems at lease rates where these tenants can save approximately 46% from being in Central San Diego—and this is based on actual done deals for basic warehouse distribution space with docks versus asking rents or flex space with lots of improvements. Tenants get a high-quality product at more favorable economics . Also, in the South Bay, there’s a lot of infrastructure that’s gone in and going in to support and help economic expansion, including some that will connect a third border crossing, which is expected to be done by 2019. There’s a lot of infrastructure to support the new construction for new tenants looking to enter that market. They can save money on occupancy costs as compared to other markets in San Diego. Sudberry Properties is currently in the entitlement process on about 60 gross acres of land in Chula Vista. Other than that, Chula Vista is about 100% built out with no other plans for development.