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August 22, 2017
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Mid-Year Numbers Flat for San Diego Industrial Sector

7/20/17

San Diego’s industrial sector showed a minimal loss in occupancy during the second quarter, although it’s viewed as a mere blip as the market as a whole maintains solid footing, according to Cushman & Wakefield’s just released Q2 2017 San Diego Industrial Market Report. Overall, this sector recorded a slim 121.7k sf of negative net absorption in Q2 2017, halting the trend of 23 consecutive quarters (Q3 11 through Q1 17) of industrial expansion. Year-to-date, however, occupancy is still in the black.

Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said, “Our brokers have noted that ‘summer may have come early’ for the San Diego industrial market, meaning the second quarter was best characterized by slow-moving deals and new construction projects—the occupancy loss is expected to be temporary, however, and we expect things to resurge ahead.”

She added, “At the close of the second quarter of 2017, industrial vacancy in San Diego stood at 5.1%, virtually unchanged from the last quarter. Overall, vacancy has been hovering around 5% for the last nine quarters, indicating consistent demand for industrial product countywide. Further, vacancy is up only 10 basis points (bps) from a rate of 5% a year ago, a minimal amount considering 695k sf was delivered—37% which was pre-leased—during the same time period.”

The best performing submarkets in second quarter 2017 by square feet absorbed were Otay Mesa, Escondido, Poway, Oceanside, and Vista as these five submarkets combined for 271k sf of growth. However, it was still not enough to combat quarterly losses in other submarkets such as Carlsbad as well as Carmel Mountain, Sorrento Valley, San Marcos and Kearny Mesa, which all experienced various levels of negative net absorption—tenants returned a combined 300.7k sf to these markets in Q2, off-setting the quarterly gains of the aforementioned top five growth submarkets. Notably, however, the larger Carlsbad submarket is still net positive at midyear.

In the first half of 2017, the North County submarket led the entire county in occupancy growth with 230.6k sf, compared to Central County (234.5k sf loss) and South County (64.3k sf growth).

Dennis Visser, SIOR, Managing Director with Cushman & Wakefield in San Diego, said, “Although we observed a modest level of occupancy loss, there continued to be several notable move-ins during the quarter. The largest absorption of the quarter stemmed from General Atomics’ acquisition and occupancy of a 52.2k sf R&D building in Poway. Two other large move-ins this quarter were found in Otay Mesa distribution buildings, where Skiva Graphics expanded into an additional 50.9k sf and On-Time Logistics occupied 44k sf. In North County, PODS moved into 43.2k sf of manufacturing space in Vista.”

He added, “However, we also saw multiple move-outs and downsizing by tenants, contributing to shrinking growth this quarter. Ardea Biosciences Inc moved out of 61.4k sf in Sorrento Mesa. Pulse Electronics vacated its owned building in Carmel Mountain, putting it on the market for sale; the company downsized their corporate headquarters leasing just over 16k sf at a newly-renovated creative office building in Sorrento Mesa. FedEx downsized at their Miramar facility by 47.2k sf, although Allied Building Products will soon be backfilling the space in the third quarter.”

While no new industrial buildings were delivered in the second quarter of 2017, there has been a total of 178.3k sf of new product delivered to the market as of midyear 2017: buildings A and B at Elevate in Carlsbad totaling 115k sf and 42k sf, respectively, and then Extension in Vista at 21.4k sf.

Bryce Aberg, Executive Director in San Diego, said, “Although there are currently 12 industrial buildings totaling nearly 1.2 msf under construction, it is unlikely this level will satisfy demand for new, functional space. According to our calculations, 57% of industrial space countywide was built before 1990 and only 2.3% of space was built after 2010. This means that more than half of leasable industrial buildings in San Diego are lacking modern design features for today’s demanding tenants who require high-functioning and efficiently designed product. This trend has led to an increase in speculative construction.”

Of the space currently under construction, 776k sf, or 66% is speculative. During the second quarter, construction commenced on two more spec buildings totaling 90.5k sf at the Escondido Victory Industrial Park. Nearly 60%, amounting to five buildings and 702k sf, of the total product currently under construction is located in Carlsbad. Due to its proximate location to a large, skilled employee base and availability of developable land, Carlsbad continues to experience the highest level of construction activity.

Aberg added, “Currently, we are tracking 3.7 msf of active tenant requirements for space over the next 24 months, with nearly 60%, or 2.1 msf, of these users now in the earliest stages of their pursuit, having opened their search or toured the market. While not all will transact, this gives us a good indication for potential near term activity.”

Campion concluded, “Despite the dip this quarter, the overarching economic expansion occurring at a national and local level as well as pent-up demand from tenants, will boost activity in the second half of the year. Absorption, leasing, and construction are all expected to pick up as the summer winds down and tenants, who have been waiting for new, functional space, are able to occupy newly-delivered space.”





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