Will San Diego Face Industrial Oversupply?
In the third quarter, construction activity continued to rise to more than 4 million square feet, even as leasing absorption has slowed.
The new construction pipeline for industrial product in San Diego continued to grow in the third quarter even as the market vacancy increased. New construction activity grew to 4.2 million square feet in the market, according to a report from JLL, including nearly 1 million square feet of speculative development. Despite the destabilization in the market due to the pandemic, new industrial supply is in high demand and continues to lease quickly upon or even prior to delivery, and there is little fear of over development.
“Approximately 4.4 million square feet of new Low Finish warehouse product is expected to be built over the next three years,” Greg Lewis, EVP at JLL, tells GlobeSt.com. “The vast majority of this product will be located in Otay Mesa where larger parcels of land still exist.”
The vacancy rate has increased nominally during the pandemic, but over the last two years, the vacancy rate in the market has been stable at or near 4.5%. “Overall vacancy for industrial has remained steady at around 4.5% since the beginning of 2018 despite nearly 5 million square feet of new construction deliveries over the last three years,” says Lewis.
If the historical leasing demand holds, Lewis expects the vacancy rate to remain stable even with an increase in new supply. “To put this in perspective from a macro level, if all of this product is delivered and based on historical absorption patterns, the industrial vacancy for San Diego is still expected to remain at +/- 4.5%,” he says.
Through 2020, leasing activity for new product has been strong, despite the challenges from the pandemic. “Of the 913,000 square feet of new low finish deliveries in 2020 throughout San Diego, an impressive 97% has already been leased which speaks to occupiers’ desire to lease newer, functional class-A product. In addition, 80% of the 4.3 million square feet that is currently under construction is already spoken for in the form of build-to-suits,” says Lewis. “Therefore we do not have concerns about being overbuilt based on a finite amount of land and limited options for future development throughout most of the county.”
In addition, the rate of new construction activity is slowing due to lack of available land. “Looking forward, development options for large scale industrial product will continue to dwindle in Central San Diego and North County,” says Lewis. “Moving forward, limited new construction in Central San Diego will come in the form of repositioning efforts and teardowns.”