Warehouse Space Drives Rent Growth in San Diego

Warehouse and distribution buildings have driven the majority of San Diego rent growth activity in recent years. According to a new report from Newmark Knight Frank, rents for warehouse and distribution space have increased more than 50% in the last five years. San Diego has a diverse pool of industrial users, including life science and R&D activity, and warehouse spaces are the most popular for the region’s user base.

“Warehouse and distribution space is the root for so many product types, and as such is the main driver of industrial rents in San Diego,” Paul Britvar, director at Newmark Knight Frank, tells GlobeSt.com. “At present, Flex, R&D, manufacturing, life science buildings, GMP manufacturing operations and some creative office developments are all derived from simple warehouse buildings, which sets the stage for a balancing act between the availability of warehouse buildings and other product types that are converted into a new use.”

San Diego isn’t the only market with a rising demand for warehouse space. Ecommerce has been the biggest driver of market demand for warehouses and while San Diego has a diverse pool of tenants looking for warehouse space, ecommerce is certainly a major driver. “In addition to this theme, over the past three years, faster-paced rent growth has been attributed to the ever-growing presence of ecommerce and the distribution needs that accompany it,” adds Britvar. “Terms such as the “Amazon effect” have been coined to explain the shift, but there are other factors at play.”

However, industrial rents aren’t only driven by rising demand. Southern California industrial product is also functionally obsolete in many cases, and rising rents are specific to new quality buildings. “Rental rates on industrial buildings are influenced by many factors. The lack of ‘functional’ options for distribution and warehousing categories has put heavy upward pressure on rents,” says Britvar. “Many buildings were developed in San Diego in the 80s and 90s, causing functional obsolesce in many aspects.”

As a result, newer buildings aren’t only commanding the highest rents, but are also renting the fastest. “Newer buildings have become the darling of demand – those constructed later than 2010 have experienced a rapid lease-up process while older buildings can languish on the market,” says Britvar. “Modern day distribution users are seeking the 30-plus foot clear span warehouse space, which simply does not exist in older submarkets. This forces users to make the tough choice to settle with an older building with less functional obsolesce, and a cheaper lease rate or a better building with newer construction and desired features, but likely a less-desirable tertiary market location—where the only development opportunities exist.”