U.S. Industrial Market Spotlight: San Diego

by | 16 March 2018

“The San Diego industrial market continues to prosper due to strong tenant demand from its robust economy. Employment growth and facility expansion is occurring in telecommunications, medical manufacturing, defense, life sciences, technology, last-mile distribution, leisure/active sports and food manufacturing/production. Industrial vacancies countywide are at historic lows, new construction is limited due to the shortage of developable land and rental rates and sale prices continue to grow in excess of 10% year over year. Institutional and private capital demand is extremely strong with a surplus of debt and equity chasing limited opportunities.”Tucker Hohenstein, SIOR, Executive Vice President

Key Strengths:

San Diego is one of the most diverse industrial markets in the country with strong demand for distribution, flex, manufacturing and research and development (R&D) space. San Diego has one of the largest concentrations of R&D space with 28% of the total market inventory in this product type. Overall, the market totals 189 million square feet (MSF) and is spread over a large geography that is split into five markets: Central County, North County, the I-15 Corridor, South County and East County. San Diego is home to one of the youngest population concentrations in the country. 31% of the people who live within 50 miles of the market’s core are millennial, making the region a magnet for last-mile urban warehousing.

Logistics Driver:

San Diego has a plethora of logistics advantages from the air and sea. While not as widely known as the Ports of Los Angeles and Long Beach to the north, the Port of San Diego offers a wide range of cargo services. Some advantages of the port include its close location to both Los Angeles and northern Mexico. The Port serves as a transshipment facility for the region. The year-round mild climate is conducive to handling all types of cargo: container, dry bulk, liquid bulk, refrigerated, vehicle, breakbulk and project cargo. The Port’s two marine cargo facilities are Tenth Avenue Marine Terminal and National City Marine Terminal.

One of the most important logistics drivers of the region is its close proximity to the Mexican border. San Diego is a natural choice for warehousing product entering and exiting the country. The San Diego–Baja California region has three land points of entry: San Ysidro–Puerta México/El Chaparral, Otay Mesa–Mesa de Otay and Tecate–Tecate, as well as an additional hybrid-crossing facility in the new San Diego–Tijuana Airport Cross Border Xpress (CBX), a privately-funded facility, which opened in December 2015 and serves as an airport access terminal for users of the Tijuana International Airport (TIJ).

Vacancy:

The San Diego combined industrial/R&D vacancy dipped to 4.2%—a 31 basis point (bps) decrease from the prior quarter. Campus Point-Eastgate (15.5%) was the only submarket to end the year with double-digit vacancy rate. However, this primarily life science-based submarket had both the second highest level of net absorption for the year and improvement in vacancy—a 593 basis point (bps) drop—from a year ago. At year-end, all submarkets maintained vacancy rates under 8% for their industrial, non-R&D inventories. Total vacancy of 3.0% for industrial space decreased 42 bps compared to the prior quarter. Countywide R&D vacancy decreased by 3 bps to 7.3%. Vacancy rates for all size ranges finished 2017 at or under the 5% range with the exception of buildings over 500,000 square feet (SF), but it is important to note that there are only four buildings in this size range in the region.

Absorption:

Combined industrial/R&D demand for the year reached 2.14 MSF of net absorption. This is significantly high demand considering the diminishing base of available vacant space. In 2017, nine submarkets posted positive net absorption of more than 100,000 SF. The top markets included Rancho Bernardo (+419,135 SF), Campus Point-Eastgate (+411,858 SF) and Sorrento Mesa (+315,477 SF). 45% of the total absorption in the region was in R&D space. The life science industry continues to be a major contributor to this demand. There are over 1,200 life science facilities in the region, contributing to $34 billion of annual economic activity and employing over 100,000 people.

Development:

850,935 SF of new construction was completed in 2017. Demand within the newly built space led to 730,269 SF of net absorption—or 86% of total completed for the year. There was more than 2.8 MSF under construction throughout the county at the end of 2017; all but 130,000 SF is expected to be completed in 2018. It has been more than 11 years since this amount of space has been under development at any one time. The amount of proposed (future) development stood at 4.8 MSF. Potentially 2.8 MSF of this total could break ground and be completed during 2018. A combination of some proposed space and all the space under construction could conceivably make 2018 the most active year for new construction in 18 years.

Asking Rents:

At $12.06 per square foot per year (PSF/YR), the San Diego region has one of the highest asking rents in the country. A major reason for this is the large concentration of R&D space in the market. R&D finished 2017 with an asking rate of $17.88 PSF/YR, while overall industrial finished 2017 at $10.32 PSF/YR. Average asking rental rates will likely increase in 2018 as brand new, high-quality projects come online. These new projects will set the high point for rents and dominate the already tight market where available, leasable space in pre-existing projects continues to be limited.

Historical Data

  Inventory Overall Vacancy Rate Overall Net Absorption New Supply (Construction) Under Construction Asking Rental Rate (PSF/YR)
2008
187,166,283 9.1% -590,287 795,898 1,057,115 $11.68
2009
188,496,438 11.6% -3,636,790 895,427 121,984 $10.25
2010
188,001,081 11.3% 1,286,834 311,446 212,000 $9.88
2011
187,774,869 11.5% 170,893 291,340 253,245 $9.88
2012
186,350,915 9.8% 2,931,922 129,845 172,656 $9.84
2013
186,761,043 8.5% 2,641,461 357,283 398,407 $10.18
2014
187,354,316 6.8% 3,124,302 406,490 112,824 $10.94
2015
188,138,529 4.8% 4,132,104 500,752 1,419,377 $11.97
2016
189,570,518 4.8% 1,264,363 1,259,809 1,360,194 $12.36
2017
189,057,028 4.2% 2,210,290 850,935 2,811,454 $12.06

  Overall Vacancy Rate 2016 Overall Vacancy Rate 2017 Asking Rental Rate 2016 Asking Rental Rate 2017
10,000-24,999 SF
3.5% 2.9% $13.55$14.60
25,000-49,999 SF
4.9% 4.8% $13.07$12.61
50,000-74,999 SF
4.8% 5.0% $11.08$11.10
75,000-99,999 SF
7.1% 4.2% $11.21$9.84
100,000-249,999 SF
6.6% 5.4% $12.18$12.15
250,000-499,999 SF
2.8% 1.3% $9.46$8.13
500,000 SF +
9.4% 10.2% --

Source: Colliers International

For more insights, learn about the top 10 U.S. industrial emerging markets positioned to experience the most robust increases in demand from occupiers and owners. And stay tuned for more U.S. Industrial Market Spotlights!

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James Breeze is National Director of Industrial Research for Colliers International in the United States. Based in the Greater Los Angeles area, he prepares quarterly and specialized industrial research reports and interprets trends and data across the country.