San Diego's industrial market is seeing dynamic leasing activity that has created limited supply. On the investment side, it is a similar story. The dynamic market has driven tremendous investment interest; the problem, however, is that no one is selling. The one major player in the market seems to be trade buyers that are leaving even tighter cap rate markets, like Los Angeles and the Inland Empire, and trading into San Diego industrial product, when they can find it.

“We are seeing strong demand from trade, 1031 exchange buyers,” Sean Williams, a VP at CBRE and an industrial expert, tells GlobeSt.com. “These buyers are coming from a variety of other markets, some even foreign. They can trade our of really low cap rate deals into a San Diego property, which is a significant basis point spread from what you are seeing in other markets.”

In some markets, investors from other assets classes have traded into industrial product because of the recent explosion in the market, but in San Diego, the trade buyers are almost universally industrial investors looking for better returns. “Most trade buyers are like kind,” explains Williams. “Occasionally, you will see someone trade out of multifamily or retail into industrial, but generally, this is industrial capital. That is because the industrial guys feel like if they understand the market in Greater Los Angeles, for example, they feel like they have a leg up in understanding that same marketplace down here.”

Even though there is strong demand from trade buyers in San Diego, there still aren't a lot of opportunities, and these buyers are seeing a lot of competition, both from local investors and owner-user buyers. With the strong leasing activity, most buyers, however, are reaping the rewards and choosing not to sell. “There are not a large volume of sales transactions happening right now, because people believe in the industrial segment and they believe in San Diego long-term,” explains Williams. “A lot of owners are in a good position to just cash checks, and these properties become mailbox money. There is also no place for owners to reinvest that capital in San Diego without going to an asset class that isn't their core competency.”

New construction activity may help, but not significantly. According to the first quarter report from CBRE, construction activity is at a post-recession high with 37 buildings totaling 3.3 million square feet under construction.