SAN DIEGO—Expectations for a gradual increase over the remainder of the year and into early 2016 aside, the outlook for San Diego's industrial lease rates is “highly dependent upon the local and overall economy,” Colliers International's SVP Bob Mooney tells GlobeSt.com. Reports for industrial leasing here have been exceptionally positive, with Cushman & Wakefield reporting a 5.3% vacancy rate (including sublease space) for Q3; this shows a moderate decrease from 5.8% in Q2 2015 and a substantial drop from 7.1% one year ago. The market is especially tight for manufacturing space which stands at a 3.9% vacancy rate, followed by distribution space at 4.7%, incubator multitenant space at 5% and R&D at 9.1%, which dropped 40 basis points over the past year, according to C&W.

After Colliers' recent report showed lease rates for the region at an all-time high, we spoke exclusively with Mooney about the market and where he sees it headed.

GlobeSt.com: Where do you see rental rates for the San Diego industrial market headed?

Mooney: Currently, industrial rental rates have stabled out at an all-time high, and I expect they will experience a gradual increase over the remainder of the year and into early 2016. With that being said, the outlook for leasing rates is highly dependent upon the local and overall economy.

GlobeSt.com: Who are the buyers most interested in industrial in this market?

Mooney: The strongest interest is coming from private capital and institutional investors as well as owner/occupants. Strong demand paired with high occupancy levels are driving industrial building owners to hold on to properties. This is, in turn, generating strong leasing activity since they are able to attract tenants and can receive higher rents.

GlobeSt.com: Are there new industries the industrial real estate sector is serving in San Diego?

Mooney: The industrial real estate sector is seeing continued growth from the defense manufacturing, construction and building materials and biotech industries. Breweries continue to be another top industry that is expanding into industrial space in almost all submarkets across the county. Even “incubator” space is being repurposed for brewery usage based on a recent acquisition by SR Commercial in Vista.

GlobeSt.com: What else should our readers know about San Diego's industrial market?

Mooney: While vacancy is low in all submarkets, industrial tenants focus on the fit of the building to their business operation. Most of the tenants searching for space are warehouse/distribution, logistics, or existing manufacturing companies not relocating into San Diego for the first time.

Spaces that are 15,000 square feet and larger that are not well suited for warehouse/distribution or logistics users, but are better suited for manufacturing, and service companies will remain vacant longer due to a lackluster demand for this type of space. These properties have higher amount of office, few if any docks and low ceiling height, among other features. Warehouse/distribution and logistics tenants prefer higher ceiling heights than is available in most industrial submarkets. Most warehouse/distribution buildings in the geographic area stretching from Miramar to Chula Vista have ceiling clear heights of 24 ft. or less and these types of tenants prefer 27 ft. to 30 ft. plus.

Many of the submarkets also feature older buildings with loading areas that cannot accommodate modern semi-trucks' larger size. Many of the older warehouse/distribution buildings in Central San Diego and South Bay, excluding Otay Mesa, are becoming harder to lease because areas near loading docks for trucks to maneuver are shorter than 120 ft. in depth. The preferred size is 130 ft. and larger due to the size of modern semi trucks.

The buildings that are in the highest demand to lease have the combination of high warehouse clear height, numerous docks, ample-sized truck court and minimal or no mezzanine office space.

Instant Insights /

What Will Affect SD's Industrial Lease Rates?

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