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San Diego Industrial Market Explodes with Nearly 2 MSF Growth in 2018, as Rents Reach Record High

1/29/19

This report was provided by real estate services firm Cushman & Wakefield

San Diego’s industrial sector saw occupancy growth explode in 2018, achieving nearly 2 msf of net absorption. The annualized figure for 2018 more than doubled the net growth of each of the past two years, according to the latest data from Cushman & Wakefield. Meanwhile, the average asking rent set another all-time high to conclude the year.

Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said, “After a sluggish start to 2018, the final three quarters of the year all reported robust gains, raising net absorption to 1.9 msf annually. The fourth quarter marked San Diego’s 29th of the last 30 quarters to report occupancy growth—only the second quarter of 2017 had reported a loss during this long stretch. Further, compared to the fourth quarter’s move-ins, which consisted of organic expansions as well as pre-leased new construction, the quarter’s move-outs were minimal.”

According to the report, at the close of 2018, overall industrial vacancy in San Diego stood at 5.4%, a modest increase of 40 basis points (bps) from the prior quarter and 60 bps above year ago. The fourth quarter of 2018 marked the first quarter in more than a year which vacancy moved above the 5% threshold. Notably, direct vacancy (excluding sublease space) was just 4.4%.

Campion said, “This slight quarterly increase in overall vacancy was fully expected due to the large amount of speculative construction that delivered in the final period of the year, as over half of the quarter’s construction completions were not pre-leased before delivery.”

She emphasized, “Keep in mind, in the last 18 months, nearly 3.4 msf of new industrial product has been delivered. Yet, vacancy continues to remain stable at or around the 5% mark. This is a result of the strong demand we continue to see in this sector. In fact, this year’s aggressive tenant activity was bolstered by the delivery of several large pre-leased construction projects. And we expect this trend to continue into 2019.”

And while the total net growth of 2018 did not quite reach the lofty levels achieved during 2012 through 2015, which averaged 2.5 msf per year, or from 2004 through 2006 which averaged well over 3 msf per year, the 2018 figure is still viewed as a robust figure given its place in the current and longstanding cycle, as well as in exceeding the past 15-year annual average by nearly 500k sf.

The report indicated North County remains the market leader, with 454k sf of growth in the fourth quarter. South County showed a marginal gain of 73k sf, whereas Central County returned 95k sf of space. Regionally, North County also dominated 2018 as a whole with over 1.3 msf of net growth in 2018, with Central County and South County also seeing annualized growth of 346k sf and 289k sf, respectively.

According to the report, the overall average asking rent for all industrial product combined was $1.11 per square foot (psf) per month on a triple net basis. This compares to previous averages of $1.07 psf last quarter and $1.03 psf a year ago. The current average of $1.11 psf is the highest rate level the firm has ever tracked, and marks an increase of more than 20% since the Great Recession ($0.92 psf in Q2 2009).

Across the San Diego landscape, new construction remains a key segment of the market’s growth, demand and vitality. Cushman & Wakefield tracked 1.1 msf or 13 buildings receiving their Certificate of Occupancy, bringing 2018 annual new deliveries to over 2.9 msf. This compares to the previous 10-year (2008-2017) average of just 532k sf. Across Q4 2018 deliveries, 48% was due either to tenant pre-leasing or owner-occupants. Meanwhile, the report states there is another 1.4 msf or more expected to be completed in 2019, of which 23% is currently pre-leased.

Aric Starck, Executive Managing Director with Cushman & Wakefield in San Diego said, “While these recent construction levels seem significant, with a low countywide direct vacancy of 4.4%, it is unlikely that this supply will satisfy ongoing demand for new, functional space. According to our calculations, 56% of industrial space countywide was built before 1990 and just 4% of space was built after 2010. This means that more than half of leasable industrial buildings in San Diego lack modern design features for today’s demanding tenants who require high-functioning and efficiently designed product.”

He added, “This trend has led to an increase in speculative construction as developers and landlords become more bullish on their prospect of leasing new space. Of the space that is currently under construction, 73% or 994k sf is being built on a speculative basis.”

Starck also noted, “San Diego’s industrial fundamentals remain strong and our pool of tenant demand remains solid still with 2.5 msf of active tenant requirements. Over 60% or 1.5 msf of these users are in the earliest stages of their pursuit, having opened their search or toured the market."

Bryce Aberg, Executive Director with Cushman & Wakefield in San Diego, added to the positive momentum, “Correlating directly to San Diego’s solid market fundamentals and robust leasing activity along with the state of the industrial sector as a whole, in 2018 we saw a number of investors remain drawn to industrial product, whether it was acquisitions of large block portfolios or smaller multi-tenant facilities. Many investors were looking to further diversify their portfolios and we expect they will continue to ahead as well. And despite sales supply shrinking due to such demand, there is still plenty of opportunity in our market for a broad spectrum of buyers.”






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