Market Snapshots

Market Snapshots — July 2018 issue

Carrie Rossenfeld Market Snapshots

Business-shaping excerpts from industry reports

JLL's Q1 San Diego Life Sciences Report

San Diego life sciences leasing activity in Q1 was led by small and mid-size companies, with space needs under 35,000 square feet, which accounted for 95 percent of the total completed transactions during the quarter. Leasing activity was driven by new company formations and local company growth, which caused the total availability rate for the San Diego life-sciences cluster (Torrey Pines, UTC/Campus Point, Sorrento Mesa, Sorrento Valley) to end the quarter at 8.3 percent, a 70 basis-point decrease from the fourth quarter of 2017.

Direct availability of space ended the first quarter at 5.8 percent, a 10 basis-point decrease from Q4 2017 and a 190 basis-point decrease from the same period a year ago. Sublease availability recorded a larger reduction during the first quarter, ending at 2.5 percent, a decrease of 60 basis points from the prior quarter and a 60 basis-point decrease from Q4 2017.

Large user activity, particularly among big-pharma companies, has been notably absent in San Diego.

Savills Studley's 2018 Effective Rent Index for San Diego and Orange County

This report studies effective rental-rate trends and the real cost of occupancy for tenants in major central business districts and surrounding suburban markets.

Leasing volume in Downtown San Diego was sustained, totaling 1 million square feet in 2017. The relocation of a few tenants from suburban locations and increased interest from the tech sector boosted activity. In the wake of a couple of years of sustained activity, the pool of quality class-A space in Downtown has been depleted. Tenants will face increased rent during 2018 as landlords take advantage of a limited set of quality blocks and negligible construction.

Orange County posted a third straight year of above-average leasing volume, even as rent pushed further into record territory. A diverse array of firms was once again willing to pay top dollar at Irvine Spectrum Center and Fashion Island. Emboldened by sustained demand, a few owners are proceeding with speculative office development. It will take several quarters for much of the new product to deliver. In the meantime, quality spaces will face increased rent.

Marcus & Millichap's Retail Research 2018 Investment Forecast for the Riverside-San Bernardino Metro Area

Cycle-low vacancy persists amid influx of new supply. Over the past five years, employers created 275,000 jobs, bolstering incomes and driving new household formations. These factors, coupled with the region's lower cost of living, support strong increases in retail spending. In 2018, the metro again leads all Southern California metros in rate of employment growth, albeit at a slower pace than in previous years, driven by a sizable logistics industry, steady government, and health-related hiring. Continued economic expansion sustains retailers' confidence in the Inland Empire, motivating more tenants to seek additional space or establish a local presence. This demand is met with new supply, as more than 50 projects are slated for delivery this year. Yet, a balance between new inventory and net absorption occurs, enabling the metro's vacancy rate to hover near 8 percent for a third straight period.

Newer properties drive deal flow. Motivated by rising asset values and a growing buyer pool, owners list assets with plans of trading up or reinvesting in another property type following disposition. Attracted to pricing trends that trail the previous cycle's peak, more buyers from neighboring metros pursue opportunities locally, targeting cap rates that exceed their home markets by 50 to 100 basis points. Post-2000-built properties  are highly coveted throughout the Inland Empire, with investors most focused on centers, fast-food establishments, and drugstores constructed within the past 10 years. These assets are sought after in South Riverside County, where the resurgence of single-family construction drives investors to Menifee and Perris. Overall, buyers of newer-vintage properties throughout the metro obtain 4 percent to low 6 percent returns. Investors seeking higher minimum yields target older centers in East San Bernardino County and the Airport Area,  home to many sub-$5 million trades.

CBRE's Q1 San Diego Industrial Report

San Diego's industrial post-recession records continued into the new year. According to CBRE's industrial expert Sean Williams, "I predict 2018 to be similar to 2017, renewal transactions will outnumber new deals, high-water marks will continue to be hit on rental rates, and absorption will continue to trend positively but at a more moderate pace."

Average asking rates for both high- and low-finish product continued to climb from post-recession highs to unprecedented levels. Both high-finish and low-finish product reached all-time highs in Q1 2018, reaching $1.42 NNN and $0.91 NNN, respectively. The rise in asking rate was due in part to below-average price product getting absorbed and above average-price product hitting or remaining on the market.

Net absorption slowed in Q1 2018 but remained positive with 107,860 square feet. North County, specifically Carlsbad, experienced the most positive absorption in Q1 due to sizeable new deals and leased construction deliveries, which carried absorption in the region over 200,000 for the quarter.

Despite net absorption being positive for the fourth straight quarter, the overall vacancy rate in the county increased 20 bps to 4 percent, due largely to two of the three delivered buildings coming on line as vacant in Q1. A few large vacancies in Kearny Mesa (131,000 square feet), South Bay (103,000 square feet), and East County (90,000 square feet) contributed to the increase.

Overall leasing activity in the county was 3,063,886 square feet, an increase of nearly 537,000 square feet (+21.2 percent) year over year. General leasing activity in Carlsbad surpassed 600,000 square feet, which was the most for the submarket in the post-recession era.

Construction activity continued to push post-recession highs, with 37 buildings totaling 3,286,554 square feet under construction in Q1 2018, while 10 new buildings broke ground in Q1, including six small warehouse buildings at Poway Tech Center, totaling 82,742 square feet. Warehouse product has the most square footage under construction with 2,490,393 square feet, a majority of which resides in North County.