The San Diego industrial market is starting to take off with activity akin to surrounding Southern California markets. According to a report from Cushman & Wakefield, the industrial market recorded 2 million square feet in absorption activity in the San Diego market, more than double the net growth in the last two years. The activity pushed asking rents to record-breaking numbers of $1.11 per square foot, up from $1.07 per square foot in the fourth quarter 2017.
“Net occupancy growth was solid in 2018 with nearly 2 million square feet, largely as a result of an ongoing strong economy coupled with leasing activity stemming from organic expansion and as well as pre-leased new construction,” Bryce Aberg, executive director at Cushman & Wakefield, tells GlobeSt.com. “Among the industries driving industrial absorption in 2018 included manufacturing, last mile transportation, life science, and defense. North County was the dominant sub-region in 2018 with over 1.3 million square feet of net growth for the year, with Central County and South County also seeing annualized growth of 346,000 square feet and 289,000 square feet, respectively.”
Along with strong demand and absorption numbers, new San Diego industrial submarkets are beginning to emerge. In 2018, the I-15 Corridor and the Otay Mesa market saw the biggest influx of new users. “We were able to see significant changes to our market as a whole with such strong demand,” says Aberg. “We have seen a rise in rental rates like nowhere else in the nation down in Otay Mesa. The only possible match would be the East Inland Empire, which has seen historical gains in the upswing. I believe we will continue to see positive growth in both the I-15 and Otay Mesa, with our other submarkets staying tight and controlled as usual.”
The strong absorption rate also helped to drive market vacancy to 5.4%, inching down only slightly from the previous quarter. The limited availability has tempered industrial growth. “While occupancy growth was strong annually, especially relative to recent years, because the market is so tight, our growth potential has still been held in check a bit,” says Aberg. “However, new construction is really helping to aid demand. With a good amount of quality new product coming online, tenants have been willing to move to these newer facilities which has helped increase our absorption numbers, and will continue to do so forward.”
The tight market supply, however, has created a compelling story for investment capital in the market. In 2018, there were large portfolio transactions. “This means that we can count out a large portion of our minimal inventory in portfolio's to be a factor in 2019,” says Aberg, adding that the market also has a limited construction pipeline, helping to fuel investment. “On the flip side, we have historically been underbuilt. When looking at the central markets, there are only a handful of lots that are under development. To find any type of spec buildings you'd need to go up to the northern markets or down south to Otay Mesa.”
The momentum should keep up through 2019, even with increasing costs of capital. “I think we have to look at the bigger picture here. While the cost of capital has increased slightly from its all-time low, it is still relatively cheap in the overall scope of things,” says Aberg. “I don't see investment sales slowing in the upcoming fiscal year as I don't believe the decreasing market sentiment is as valid down here in Southern California, especially San Diego. With vacancy, absorption, and rates where they are, and returns compressed in the markets all around us, San Diego acts as a sort of safe haven for investors who want prime Southern California assets and still looking for some type of return.”
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Kelsi Maree Borland
