Siempre Viva Business Park adds much-needed inventory to San Diego’s Otay Mesa. | Courtesy representatives of Murphy Development

SD Industrial Absorption Bounces Back

Carrie Rossenfeld Industrial

It looks like the San Diego industrial market has recovered from its absorption slowdown of last quarter, according to a report from Cushman & Wakefield (C&W). The report shows that the market saw 632,000 square feet of positive net absorption between April and June, an amount much higher than the previous two quarters combined and among the highest levels the market has seen during recent years.

The report also reveals that first-half absorption figures for the market place it “well above” levels seen in the first half of both 2017 and 2016. “Despite the strong occupancy growth during the second quarter, however, vacancy did inch upward a notch to 4.9 percent, a slim ten basis-point increase from the previous quarter,” C&W says. “Nonetheless, vacancy still remains a few ticks below its level a year ago of 5.1 percent.”

C&W also reports that Jolanta Campion, its research director in San Diego, said, “San Diego’s industrial sector ramped up aggressively during the second quarter, bolstered by the completion and subsequent occupancy counts of several large pre-leased projects. In fact, of the nearly 1.2 million square feet (nine buildings) of new construction delivered in the second quarter, 70 percent was pre-leased.”

Certain North County submarkets in the region fared especially well when it comes to industrial absorption. According to the report, Ryan Spradling, director with C&W brokerage in San Diego, said the firm’s research showed gains of over 100,000 square feet in Poway, 245,000 square feet in Escondido, 184,000 square feet in Carlsbad, 171,000 square feet Torrey Pines, and 168,000 square feet in San Marcos.

The report quotes Spradling as saying, “Poway’s net growth of 299,000 square feet, the highest of the quarter, was driven by General Atomics taking occupancy of its 303,000 square feet space across three new buildings at Ridgeview Business Park. Escondido’s occupancy also grew noticeably by 245,000 square feet, largely due to Veritiv moving into its new 212,000-square-foot facility. And Carlsbad’s strong level of 184,000 square feet was driven by HM Electronics moving into its new 140,000-square-foot location.”

He added, according to the report, that North County is a prime location for industrial development due to its amount of available developable land and accessibility to the region. “We believe that South County, specifically Otay Mesa, will have a strong second half of 2018 as well and post impressive numbers before year end.”

Otay Mesa is definitely seeing some industrial development. As SoCal Real Estate recently reported, Murphy Development’s Siempre Viva Business Park there continues to add inventory to this growing submarket.

Meanwhile, other SoCal markets continue to experience tight inventory, according to a report from JLL. The firm says 1.4 million square feet of industrial space is currently under construction, the highest it has been since the beginning of 2006. However, ever-rising construction costs are slowing down the pace of development, which is failing to meet demand. This is forcing many users, especially those who are growing, to seek space in a wider radius around Orange County.

Also, JLL reports that West Inland Empire’s greenfield industrial-development potential is decreasing since it was the first submarket in the IE to benefit from SoCal demand and therefore has less developable land than East Inland Empire. West Inland Empire contains 37 percent of the IE’s total construction pipeline, according to JLL, and the vacancy rate in the submarket fell to 2.2 percent during the second quarter, an all-time low. The firm compares the market to neighboring San Gabriel Valley due to its low available inventory and accelerating rental rates.

Meanwhile, in the East Inland Empire, demand for big-box space continues. JLL reports that the IE market has five speculative-industrial projects larger than a million square feet under construction at this time, and four of them are in the eastern part of the market. New construction starts are waning while users are still demanding class-A industrial space, making fundamentals for this sector particularly strong.