Are Industrial Rents About to Fall in North County?

San Diego’s industrial market is dynamic. It benefits from both manufacturing and ecommerce demand that has driven vacancy rates to sub 2% in some submarkets. North San Diego County is no exception. The market has a sub 6% vacancy rate, with high demand from small manufacturing and distribution users. However, with 1.9 million square feet of new construction in the development pipeline, rental rates might hit a wall this year. To get a peek inside this pocket of San Diego’s industrial market, we sat down with Rusty Williams, a principal in Lee & Associates North San Diego office and a market expert. Here he talks about the demand dynamics, how the new development is impacting the market and why there aren’t more for-sale options for owner-users.

GlobeSt.com: What size industrial product is in highest demand from tenants in North San Diego County?

Rusty Williams: The tenant demand is healthy for all size ranges, but there is the most demand for spaces in the range of 5,000 to 30,000 square feet. There are a lot of small businesses in North San Diego County that need small spaces. The vacancy rates are below 6% across the board, but there are some larger spaces that are available and haven’t been absorbed yet. Some of the new construction in Carlsbad, for example, hasn’t seen a ton of preleasing. Tenants want to see, touch and feel before leasing.

GlobeSt.com: What is development activity like?

Williams: In North County, we have had land available for development. We are delivering 1.9 million square feet in North County that either was delivered at the end of last year or that is in the pipeline. Most of that construction will deliver this year. All of this new product is for lease. There is almost nothing being built for sale. There is one property in San Marcos that is being listed for sale, but the properties are listed north of $200 per square foot, which is extremely expensive for this market.

GlobeSt.com: How do you think this development will impact the market? Is there enough demand to absorb the new development?

Williams: I am curious. I think that we are going to see vacancy rates go up, because we don’t typically absorb that much square footage in a year. As all of this product comes online, my suspicion is that developers are going to be reluctant to lower their lease rates, and if they don’t lower their lease rates, there is no need for second-generation buildings to lower their lease rates either. Ultimately, time will tell.

GlobeSt.com: With high demand from owner users, why do you think more of the new construction isn’t available for lease?

Williams: There is more profit to be made by leasing, and they are able to get investors and lenders excited about where rental rates are. These projects are expensive to build, and selling them doesn’t pencil as well because of where lease rates are today. There is a lot of demand, however, from small owner/users for small buildings. If someone were to deliver a project with small properties, I think it would be successful.