San Diego’s Industrial Activity Isn’t Tied to Ecommerce

“San Diego is a different market,” said Ryan Grove, director of real estate development at Ryan Companies US, last week on an industrial panel at RealShare Southern California. Ecommerce has been hailed as the driver of the immense industrial activity that we have seen in the last few years, but in San Diego, the ecommerce market has been a minimal driver of activity, limited largely to last-mile centers. Still, San Diego has a robust industrial market with limited space and historically high rents. Instead of ecommerce, it is being driven by a dynamic demand from a networker of smaller users.

“San Diego is at the end of the road,” Grove said on the panel. “We don’t see a lot of big distribution centers. We are seeing industrial rents absolutely hitting high water marks for San Diego. We all jumped to ecommerce as a reason why this has driven the market.” But, for San Diego, that activity has really only been on the delivery side of ecommerce, he added.

As a result, San Diego’s stock of product looks different than the stock in Orange County and Los Angeles, where larger buildings are more common and in need. In San Diego, the average building size in below 100,000 square feet, and often closer to 40,000 to 80,000 square feet. “A 300,000-square-foot building is big for San Diego, but we are pushing buildings in that 200,000-square-foot range and capitalize on those large blocks. We are bullish on trying to capture that market and the rent premium for those companies”

The problem, however, for San Diego is that there is no land to build any more supply, one major factor that is driving these historical prices. “In the last few years, we have run out of land in the central markets. San Diego is so land constrained,” said Grove.

Where land is available, the other problem is hard construction costs. New tariffs have driven steel costs up 15%, including metal drywall studs, and sheet metal has increased 5% to 7%. “Even non-tariff metals are up,” added Grove. “It has caused lot of uncertainty.” If you can cope with the limited land and rising materials costs, a labor shortage is the next obstacle. There is a skilled labor shortage, and it is not only hard to find skilled labor but it is also hard to keep it,” Grove explained. “To take that to another level, nationally, there are a couple of markets that are stressed to a labor perspective. These costs have to be absorbed into a deal.”