Massive Industrial Move Outs Plague San Diego in Q4

The industrial market has been on a consistent upward trend throughout Southern California, but in the fourth quarter, the winning streak ended in San Diego, where move outs and right-sizing consolidations led to negative absorption for the quarter. According to new research from CBRE, the industrial market closed the fourth quarter with 756,126 square feet of negative absorption. As a result, the vacancy rate climbed to 4.4%. While this was surprising news, Sean Williams of CBRE says that this is not indicative of a changing market.

“This was a single instance of tenants looking to right-size their space. I don’t believe that it is an indicator that the ground is falling out from underneath us,” Williams, an SVP at CBRE, tells GlobeSt.com. “There are several instances of people reorganizing their supply chains, and that can cause negative absorption trends like this to occur. It just so happened that there was a critical mass of companies giving space back, and I don’t believe that it is related to any kind of market event. It is really a bit of a coincidence that there happened to be such a large negative absorption figure all at one time.”

Instead, Williams says that the move-outs might help to increase industrial leasing activity in 2019. With limited availability of space, lease deals have become more difficult, and this event could relieve that pressure. “There has been so much positivity and the market is so tight that there is only a certain amount of activity that can take place,” says Williams. “Leasing activity has remained okay due to renewals, but it has been impossible to have positive swings in absorption because there isn’t a ton of available inventory, particularly to scale.”

For that reason, he sees this as a potential benefit to the market, and an opportunity to test demand. “I actually don’t see this as a negative because the market got some space back, and now we are in a position where we can really get a barometer of the strength of the market because there is some vacancy,” adds Williams.

It wasn’t all bad news for the San Diego industrial market. In addition to the move-outs during the quarter, there were two large lease deals totaling 200,000 square feet. “There were two 100,000 square foot deals completed in the same quarter, with Zodiac Pools signing in North County and Tire Warehouse signing in Kearny Mesa,” says Williams. “I think those are better indicators of the condition of the market, than the negative absorption in the fourth quarter.”

As for the negative absorption, Williams expects the market to rebound quickly. “I am extremely bullish on the demand that we are seeing in the marketplace today,” he adds. “Functional product coming back on to the market will allow an opportunity for tenants to have a potential relocation alternative where, due to the tightness of the market over the past couple of years, people locations were limited. I would expect the market to rebound in the first quarter.”