Report Indicates Continued San Diego Industrial Rebound

SAN DIEGO—Cassidy Turley has released a mid-year San Diego County industrial report that shows 862,008 square feet of year-to-date net absorption—the county's best mid-year performance since 2008.

According to the study, this improvement follows 12 consecutive quarters of positive net absorption totaling 6.7 million square feet (msf), or an average of 570,000 square feet per quarter. Net absorption in the second quarter of 2014 totaled 489,139 square feet for all product types combined.

“The San Diego industrial market has been in growth mode since 2012, leasing 3.9 msf,” said Todd Davis, vice president with Cassidy Turley. “This momentum compares to the prior three years in which the market worked to recover more than 4.2 msf that was vacated in 2009, the worst year of the recession.”

The Cassidy Turley report shows that countywide vacancy for all product types, including sublease space, has likewise declined for 12 consecutive quarters, currently standing at the pre-recession level of 7.2% last recorded in the second quarter of 2006. This rate is down 180 basis points (bps) from 9% a year ago, and 550 bps lower than the peak rate of 12.7% recorded at year end 2009.

“Flight to quality and renewals within the 5,000 to 30,000 square feet range will continue to be the main drivers of leasing activity,” said Bryce Aberg, managing director with Cassidy Turley. “While some local industrial submarkets are still sluggish, the majority are more stable than they have been in years. Demand is growing across all product types, and this is reflected in vacancy declines in 12 of the county's 25 submarkets. All but four submarkets have single digit vacancy.”

The 5.3% manufacturing vacancy rate is the lowest of all local industrial product types, down from 6.4% the same time in 2013. Over the same time period, R&D vacancy of 8.8% has improved from 10.3%; incubator multi-tenant vacancy of 6.6% is down from 8.1%; and distribution vacancy of 6.8% is down from 9.1%.

San Diego's best performing industrial submarkets in the second quarter were all in the North County, with Vista, Oceanside and Escondido reporting 540,000 square feet of combined net absorption. The two largest move ins of the quarter occurred in Vista, with Applied Membranes occupying 113,235 square feet at 2450 Business Park Drive and Apical Industries occupying 69,698 square feet at 3030 Enterprise Court.

In contrast, Downtown San Diego, Carlsbad and Otay Mesa returned the most space to the market in the second quarter with combined negative net absorption of 161,000 square feet . The largest move outs were by Applied Membranes, which vacated 50,980 square feet at 2325 Cousteau Court in Vista; MaxLinear, Inc., which vacated 29,873 square feet at 2051 Palomar Airport Road in Carlsbad; and White Cap Construction Supply, which vacated 26,546 square feet at 3451 Main Street in Chula Vista.

Of the county's major industrial submarkets, Miramar leads with the lowest vacancy rate, 4.9%, followed by Kearny Mesa with 5.3%, Vista with 6.3%, Sorrento Mesa with 8.3%, Carlsbad with 10.6% and Otay Mesa with 13.9%.

The Cassidy Turley report shows that during the second quarter only two projects totaling 165,000 square feet were under construction, both located in Poway. The 115,000 square foot project located at 14105 Kirkham Way is fully preleased to General Atomics, with completion slated for later this summer. The 50,000 square foot project located at 13350 Danielson Street is also fully preleased, with Poway Weapons & Gear scheduled to move in following completion in the fourth quarter.

Completed construction includes a 156,421 square feet build-to-suit located at 2450 Business Park Drive in Vista that is 72.3% occupied by Applied Membranes, Inc. The balance of the space is available for lease.

“New speculative construction remains at a standstill as developers are reluctant to build without committed tenants in place,” said Davis. “However, now that the market is seeing real traction and notably declining vacancy, the stage is being set for a renewed interest in spec development perhaps as early as 2015. In the meantime, steady absorption of existing inventory will continue to drive vacancy rates lower.”

The average countywide industrial asking rent is 80 cents per square foot, unchanged from a year ago and consistent with past four years when rents have ranged between 78 and 81 cents per square foot.

“With the expectation of continued healthy absorption and corresponding decreases in vacancies for the foreseeable future, we anticipate rent growth in the healthier product segments,” said Mr. Aberg. “While not all landlords have been in a position to increase rents, the majority have been tightening concessions since late 2012.”