If anyone needs another signof the strong industrial demand in San Diego, look to theconstruction pipeline. According to research fromJLL, last year the San Diego market saw thelargest number of new industrial deliveries since 2001. There were15 projects delivered in the market, totaling 2.5 million squarefeet, close to the market record of 2.7 million square feet inindustrial deliveries in 2001. Industrial demand has fueled the newdevelopment activity.

“A lack of supply in the market has driven new development inSan Diego.  This is acutely evident in space larger than100,000 square feet,” Andy Irwin, VP at JLL, tellsGlobeSt.com. “Ten new leases were signed on buildings completed in2018 or under construction. The largest transactioninvolved a 273,000-square-foot build-to-suit for StoneBrewing. With the robust leasing activity in 2018, we havevery little supply of new space left countywide. Leasing activityhas been very strong by companies in the ecommerce, logistics, andconsumer products industry. Class-A industrial space hasbeen in the highest demand prompted developers to scramble to meetthis demand over the last two years.”

With a limited supply of new, class-A industrial space, the newsupply is attracting strong interest from users. These users arewilling to pay a premium to be in quality spaces. “By marketsegment, we have less than 100,000 square feet of space in newbuildings or those that have broken ground in the South County, nospace in Central county, and approximately 740,000 square feet inNorth County,” says Irwin. “We are tracking over 850,000 squarefeet of space in buildings set to be delivered this year withleases in place.  The new buildings are achieving rentsfrom 10% to 30% above average rents for their respectivesubmarkets.”

As a result of the new product, rent growth, which has alreadygrown at a rapid pace, has accelerated even more. “This has helpedto accelerate rent growth already buoyed by historic low vacancyrates,” says Irwin. “There is a vast difference in functionalitythat new buildings offer versus existing product. Stricterfire codes are pushing tenants to buildings with ESFR sprinklersystems which most existing buildings don't have. Developers are delivering buildings with 32-foot clear heights orgreater versus the last generation of buildings designed at 24feet.  This is a 33% increase in cubic capacity, which inmany cases will offset the rent difference between new and oldbuildings.”

According to the JLL report, there is another 1.8 million squarefeet in the construction pipeline. While there continues to bestrong demand for more industrial product and rental rates thatjustify new construction, Irwin expects that construction activitywill slow due to limited land. “We are almost out of industrialland in the county and the pockets where land remains have barriersto development,” he says. “The cost and time to entitle theremaining land sites will slow the pace of futuredevelopment. There are a handful of projects in the countythat are slated to start in 2019 but at a fraction to what we haveseen over the last two years.  Land pricing andconstruction costs continue to rise which further compresses yieldsand reduces a developer's ability to make a project pencil.”

While this is the highest level of new construction activitysince 2001, the market dynamics and drivers of new development arevery similar. “Rental growth and an extremely low vacancy rate hasdriven the explosion in construction activity,” says Irwin.“Development activity across the county went on hold around2009.  It remained that way for about seven years withonly a handful of build-to-suits occurring during this period.”

The new construction activity rebounded a couple of years ago asdemand for industrial space climbed, a combination of ecommerce andlife science growth. “The pioneers ramped up a few projects in 2016and by 2017 there was heavy activity in industrial landacquisition, design and permitting,” says Irwin. “This has resultedin the more than 3.5 million square feet that has been delivered oris under construction in the county. The big differencethis cycle is that we have built far less space versus the lastcycle, most of the space has been leased, and the existing demanddwarfs the supply of new buildings. Given the limited landsupply, new construction starts will significantly decline in2019. This should put continued downward pressure onvacancy.”