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November 28, 2023
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San Diego Industrial Leasing Sees Decline in 3rd Quarter

10/05/23

This report provided by real estate services firm Kidder Mathews

MARKET HIGHLIGHTS

Leasing Volume dropped to a new record low of 1.46 msf
Asking Rental Rates remained the same QOQ at $1.54
Sale Transaction Volume posted a 10-year record low of 877K SF

Market Drivers

Countywide leasing activity fell to a historic new low, posting approx. 1.46 msf in Q3. Although leasing activity has decreased in the past few quarters, smaller blocks of space in the 50k sf range have seen increased demand, leasing in record time.

Vacancy and availability rates continue to rise due to the moderation in demand, experiencing a jump of 47% YOY increase and 96% YOY increase respectively. Although vacancies have steadily risen since the beginning of the year, its predicted that they wont rise much further, maxing out at 5.5%-6%.

Rent growth has slowed recently over the past few quarters, as expected. The trajectory of the pandemic driven demand that drove industrial fundamentals to surge was expected to reach its peak within a few years after the initial skyrocketing of increased demand.

Sales volume decreased dramatically in Q3 posting 877k sf, a 10-year record low and a YOY decrease of 70% when 3Q22 posted at 2.9 msf. Investment activity has been minimal across most property sectors, as they may be holding out and waiting to see if properties turn over to banks and default.

Economic Overview

The San Diego County unemployment rate in August was 4.3%, above the year-ago estimate of 3.5%. It is up 2 basis points month-over-month, adding 4,900 jobs from April to May. This compares with an unadjusted unemployment rate of 5.1% for California and 3.9% for the nation during the same period.

Companies across the county continue to lay off employees, as reflected in the recent rise in unemployment, with the manufacturing industry showing the largest drop, down 800 employees month-over-month. Additional sectors that that saw reductions included professional services, down 600, and leisure and hospitality down by 300.

Near Term Outlook

Moderation in the industrial market is expected to continue into the end of the year and into early next year due to high interest rates and economic concerns. Rent growth will continue to slow, and although vacancies and availabilities have been rising, the local market is better positioned than compared to other major markets throughout California.

While there has been an uptick in demand for smaller spaces, were not sure how long this trend will last as the market is already seeing a dip in inventory for these spaces, with most of the availability located in South County, specifically in Otay Mesa.


The information in this report was composed by the Kidder Mathews Research Group, led by Gary Baragona, Director of Research.
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Data source: CoStar, EDD, SD Business Journal







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