Both the industrial sector and the job market in San Diego appeared to take a bit of a breather in June, according to industry reports. However, fundamentals are strong, the job numbers indicate annual seasonal trends, and venture-capital investment is on the rise here, indicating that entrepreneurship is alive and well in the market.
CBRE’s research shows the San Diego industrial market was slow and steady in Q2 with strong leasing activity. Net absorption was positive for the fifth straight quarter with 67,478 square feet, while leasing activity was 3.5 percent higher than a year ago and the overall vacancy rate in the region dropped 60 basis points (bps) year over year. Vacancy slightly increased by 20 bps quarter over quarter, due to moderate positive net absorption and a sizeable vacant construction delivery (138,450 square feet) at MCA Business Center in Southwest Riverside. 67.6 percent of the current under construction number is expected to deliver by the year end, so vacancy may bump up slightly despite the positive absorption.
Industrial construction in the market is at a post-recession high, says CBRE; however, it only represents 1.8 percent of the current rentable base — even if all product delivered vacant, the total vacancy rate would still be below 6 percent, indicating developers and financial backers are sensitive to oversupply. 67.6 percent of the current construction is expected to be deliver by year end, which will give some relief to the tight market; however, most of it is warehouse product.
CBRE also reports that San Diego’s under-construction activity was at a post-recession high in Q2, with 41 buildings totaling 3,503,817 square feet countywide. Eight new buildings, totaling 677,486 square feet, broke ground in Q2, most notably, three warehouse buildings totaling 277,793 square feet that are in Phase two of the Pacific Coast Collection in Oceanside. Four buildings, totaling 463,632 square feet, delivered with all but one tenant in place. General Atomics preleased two of the remaining Ridgeview Business Park delivered buildings in Poway for 80,500 square feet and 71,429 square feet.
“The industrial market remains tight, and leasing activity is strong, particularly from defense contractors,” says Bill Dolan, SVP of CBRE San Diego. “Net absorption was positive, vacancy and availability rates remain at historically low levels, and there is pent up demand for functional, class-A industrial buildings. While construction activity may appear high, with 3.5 million square feet currently being built, CBRE is tracking over 10 million square feet of current demand. The new construction will be a welcome relief for a lot of this demand.”
Light industrial/manufacturing product in San Diego, which represents 35.9 percent of the total industrial base here, closed Q2 at 2.5 percent vacancy, the lowest of any subtype, says CBRE. Only 2.3 percent of the construction pipeline is light industrial product, signifying that owners will have to think of creative conversions to appease manufacturing type users. Considering manufacturers added 4,600 jobs
in Q2, the lack of product to keep up with the industry growth may become an issue for relocating tenants and in turn diminish demand.
CBRE also reports that after reaching all-time highs in Q1, both high and low-finish average asking rates declined quarter over quarter to $1.36 NNN (-4.2 percent) and $0.90 (-1 percent), respectively. The larger decrease in high-finish rates was mostly due to a handful of sizeable blocks of lower-quality space available in Sorrento Mesa and San Marcos asking below average rates. Low-finish rates, though down in Q2, remained near the post-recession high of $0.91 NNN set in Q1 2018. Low-finish has showed little signs of slowing down, with rates 4.7 percent higher than a year ago.
Industrial-using employers added 13,000 jobs (+4 percent) year over year in Q2, accounting for 40 percent of jobs added. Construction employers led the way, adding 5,200 jobs (+6.6 percent), a sign that building is expected to continue.
In a separate report, CBRE reports that San Diego job growth slowed in June as employers added 22,900 jobs year over year, a growth rate of 1.5 percent, which was on pace with the national average of 1.6 percent, and manufacturers added the most jobs since October 1998 with 4,900 jobs or 4.5 percent growth year over year. The unemployment rate climbed 80 basis points from the previous month to 3.7 percent but was down 50 bps year over year and reached the lowest June rate since 1999.
San Diego Workforce Partnership reports the following quote from Phil Blair, executive officer of Manpower/Staffing San Diego: “There was an expected bump in the unemployment rate to 3.7 percent in June. It happens every summer when teachers and students jump into the employment pool, and this rate is still below the 4.2 percent of June last year. Not to worry — there are still more San Diegans working this year than last.”
According to San Diego Regional EDC, entrepreneurs are still going strong in San Diego as venture-capital investment is on the rise. In Q2, San Diego startups pulled in the largest amount of venture capital since the tech bubble of the early 2000s, fueled by investments in biotech and healthcare companies. According to a MoneyTree survey, 34 local startups raised $590 million, led by Ansun Biopharma and Cibus Global. Read more about it here.