North County Leads Industrial Activity

North San Diego County lead absorption activity in the second quarter, along with the neighboring I-15 Corridor. According to a new report from JLL, the combined markets accounted for 454,284 square feet of positive absorption. That is especially significant considering that the East County markets had negative net absorption, leading to an overall 179,576 square feet of total absorption for the San Diego market. North County and the neighboring I-15 Corridor are seeing a tremendous amount of new industrial construction, which is helping to fuel leasing and absorption in the two markets.

“Development has been pushed out to the boundaries of San Diego County. Central County is pretty much out of land for industrial development,” Andy Irwin, VP at JLL, tells GlobeSt.com. “North County has projects in all of its submarkets under constriction. In the I-15 Corridor, there are a number of healthcare properties and smaller multi-tenant projects. That is really the extent of where there is land available to develop.”

For San Diego, which is severely supply constrained, new construction doesn’t simply mean the availability of product but rather the availability of new, quality product. Quality supply is driving users to the market. “Demand has been steady, but supply is so constrained in the market,” says Irwin. “When functional new buildings are delivered in the market, we see users gravitate toward those new buildings. Absorption follows that.”

The delivery of new product is also fueling and increase in lease rates. Asking rents in San Diego were $0.92 per square foot, a record in San Diego, and Irwin says that new construction has been the primary driver of those rates. “There are two factors on leasing rates. An existing owner is going to set rates based on where he thinks the market is due to supply and demand,” he explains. “The other is that a developer is going to build projects when the rates are high enough to produce a reasonable to return. The challenge with new construction is that land prices continue to go up, the cost to entitle land goes up and construction costs are accelerating at a really fast clip. So, developers are setting rates at all-time highs, and that is because of the cost to develop. Existing product is then benefitting from this pricing. With supply being so limited, tenants have very few options.”

While North County is leading the pack today, Irwin says that South County, which is also seeing significant new construction, will likely lead the market in the second half of the year and beyond. “Once these buildings are delivered in North County, there are very few land opportunities remaining for larger tracks of land,” he says. “We are quickly going through the supply for North County. South County is the last market that has industrial land that can sustain the next decade. There is a lot of activity in the South County market, and that should show some very positive absorption by next quarter.”