SAN DIEGO—San Diego is not quite ready for multi-story warehouses—which are popular in Asiaare just beginning to make their mark in select US gateway markets—but the prime industrial overlay zone that was enacted by the City a few years ago will help to preserve certain sites here for future redevelopment into multi-story industrial, JLL VP Andy Irwin tells GlobeSt.com.

According to the firm's San Diego industrial report for the last Q4 2017, that quarter had the highest dollar volume of industrial sales in the last 10 years, totaling $692 million. As GlobeSt.com reported in October 2017, Rancho Bernardo had the highest industrial-investment sale at $330 per square feet for a 180,946-square-foot building occupied by a global e-commerce company as its distribution space.

Development-wise, there is currently 2.4 million square feet of industrial product under construction countywide, of which 1.7 million square feet is in the North County region.

In terms of occupancy, current market vacancy is at 4% and remains near the all-time low, with rents at 15.8% higher than the last peak of 2007 at $0.76 NNN. Otay Mesa had the highest leasing volume in San Diego with over 1.3 million square feet leased.

We spoke with Irwin about last-mile facilities, multi-story warehouses and owner/users in the San Diego industrial market.

GlobeSt.com: Where are the last-mile facilities expected to be concentrated?

Irwin: The demand for last-mile warehouse space is driven by the consumers. With a sweet spot of 40,000 square feet to 60,000 square feet, last-mile users are looking to be located near densely populated areas with good access to freeways and major thoroughfares. With location being the driver, this tends to be in older sections of town where buildings have inferior clear height, loading and yard dimensions.

One unique distinction to traditional distribution is the use of passenger vehicles to move product. Last-mile tenants typically require easy-to-access and functional grade doors so that a passenger vehicle can drive into the warehouse, pick up the merchandise and deliver it to the consumer on demand. To date, we have seen the highest amount of space taken in the central submarkets of San Diego, with a focus on Miramar, Kearny Mesa and pockets near the airport. The North County and I-15 submarkets are close behind Central County, with the South and East counties trailing behind.

GlobeSt.com: Is anyone talking about multi-story warehouse in this market?

Irwin: Developers are taking note of the multi-story warehouses becoming more common in Asia and beginning to show up in gateway markets like New York City. There is no distribution land available in the Central San Diego submarkets, and supply is hovering at an all-time low. As the distribution of goods evolves and smaller “last mile” vehicles are introduced into the process, warehousing design will evolve to accommodate the need to be near the consumer. Obsolete industrial buildings and underutilized industrial sites near dense populations will make for ideal targets. The prime industrial overlay zone that was enacted by the City a few years ago will help to preserve these sites for the future redevelopment into multi-story industrial. The key will be to find locations with a high floor-area ratio (FAR) or the ability to increase the FAR to allow for more building density on a site.

GlobeSt.com: Are there more owner/users or tenants in the market?

Irwin: There are very few owner/user buyers in the market due to the scarcity of supply of buildings for sale in San Diego. There is pent-up demand for quality owner/user buildings, but most potential buyers remain sidelined. Development of owner/user and incubator multi-tenant industrial buildings was very limited in this real estate cycle. Smaller buildings that were trading in the $150-per-square-foot range near the downturn are now being acquired for in the low- to mid-$200-per-square-foot range. Tenant demand remains robust, with quality buildings in short supply. We continue to see a migration of tenants into secondary submarkets because they are unable to locate suitable space in the centrally located submarkets. Rent growth is accelerating within these markets. The South County market has gone through double-digit annual rent growth the last two years. This has been a catalyst for new development in the area despite costs that have kept a close pace behind.

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

Irwin: With over 1.7 million square feet under construction, there is a substantial amount of industrial product that will be delivered in the North County markets later this year and into next year. We will be watching how this impacts rents, vacancy and values throughout the region.

Instant Insights /

Is San Diego Ready for Multi-Story Warehouses?

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