SAN DIEGO, Calif. – April 16, 2018 – According to Cushman & Wakefield’s newly released Q1 2018 market report, San Diego’s industrial market fundamentals remain strong. Statistically speaking the market appeared to have calmed to begin 2018—at least for the moment—as vacancy dipped just a nudge at 4.8% while occupancy growth was a moderate 88,600 square feet (sf). The tempered but positive activity in San Diego’s industrial sector followed what was a white hot 930,000 sf of occupancy growth observed during July to December of 2017. However, behind the surface of the first quarter statistics there is still a lot happening, which leads the firm to maintain its positive outlook.
Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said, “Overall vacancy has hovered the 5% mark for the past 10 consecutive quarters, and though settling the past few months, is still at a new all-time low according to our 15-year tracking. Meanwhile, in 26 of the last 27 quarters the industrial market has observed occupancy growth, the only momentary outlier being Q2 2017.”
During the first quarter, tenants absorbed 121,300 sf in North County submarkets, 61,650 sf in South County but returned 94,300 sf to Central County on a net basis.
Bryce Aberg, Executive Director in San Diego, said, “Last year, the industrial market took some time to get going, but with a robust second half was able to finish with nearly 1 million sf of positive net absorption as the market quickly recaptured its momentum. With the market being as tight as it is, we will not see the net absorption numbers we have grown accustomed to over the past several years. This can be attributed to the fact that there is a lack of functional space for occupiers to expand into which has spurred the spec development we are now seeing Countywide. The tenant demand is there and we fully expect to see strong numbers come year end 2018 as new product hits the market and is absorbed. Here again, we are likely just seeing some relaxing to begin 2018, but we fully expect to see improved growth ahead.
“Furthermore, it should come as no surprise that as the market tightens and we move further into the longstanding growth cycle, there will be some spotty quarters and growth will decelerate more from the tremendous years of 2012 through 2015 which collectively averaged approximately 2.5 msf of growth per year. The important thing is that fundamentals remain strong. The amount of investment capital chasing Industrial product throughout Southern California has never been more robust and San Diego is a major target. We will continue to see cap rate compression and record metrics for investment sales, with no signs of slowing.”
The Cushman & Wakefield report showed Carlsbad’s occupancy grew by just over 173,200 sf making it the most active submarket in the first quarter. Contributing to the submarket’s growth was Nortek, which took occupancy of its 89,000-sf space at the recently-delivered Beta building within Atlas at Carlsbad. Additionally, Heat Factory moved into 42,000 sf at 2793 Loker Ave., and Cal-Comp USA moved into 38,500 sf at 1940 Camino Vida Roble. Vista also recorded a strong growth of 91,000 sf in Q1 2018, while Otay Mesa rang in 2018 with nearly 82,000 sf of positive absorption. 3PL provider On Time Logistics contributed to Otay Mesa’s growth this quarter by expanding into 44,000 sf.
Per the report, the average asking rent for all product types combined was $1.04 psf per month on a NNN basis, up slightly from $1.03 psf last quarter and $1.00 psf a year ago. However, the average rent at $1.04 psf marked a new all-time high tracked by the firm, and reflects an increase of 13% since the end of the latest recession ($0.92 psf Q2 2009).
Mr. Aberg noted, “We are not only seeing asking rental rates increase but we continue to see an increasing trend of renovations of older product to make them more appealing to tenants that is also lifting all boats when it comes to rents.”
New and redevelopment remains another point of emphasis in these current market conditions. Cushman & Wakefield is currently monitoring 32 industrial buildings totaling nearly 3.3 million square feet (msf) under construction, the highest level in 12 years (3.6 msf in Q1 2006).
According to the firm’s calculations, 57% of industrial space countywide was built before 1990 and barely 3.0% of space was built after 2010. This means that more than half of leasable industrial buildings in San Diego lack modern design features for today’s demanding tenants who require high-functioning and efficiently designed product. This trend has led to an increase in speculative construction as developers and landlords become more bullish on their prospect of leasing new space. Of the space currently under construction, 74% or 2.4 msf is on a speculative basis.
Aric Starck, Executive Managing Director with Cushman & Wakefield in San Diego, said, “There is a substantial amount of new construction expected to be delivered this year, to the tune of approximately 2.6 million square feet. Every project in North County is experiencing preleasing activity prior to construction completion. With a low countywide direct vacancy of 3.8%, it will be unlikely that this supply will satisfy all future demand for new, functional space. He elaborated, “We are seeing the most robust leasing activity in 15 years. We are currently tracking 3.7 msf of active tenant requirements for space over the next 24 months, and though not all of this square footage will transact in the short term, many could align with the delivery of this new construction.” Additionally, with 37% or 874,000 sf of 2018’s expected deliveries committed to by tenants or owners including General Atomics, Vertex Pharmaceuticals, Exeter and HM Electronics, we do anticipate a momentary uptick in overall vacancy given the amount of speculative projects being delivered vacant. However, we do not expect this new, well-equipped space to be vacant long due to fervent demand.”
Looking ahead, Ms. Campion also noted, “Continuing to bode well for the industrial marketplace is that economic activity in the manufacturing sector again expanded in March, with an ISM index reading of 59.3%. Although the ISM decreased 150 bps from February’s reading of 60.8%, an ISM reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting. The overall economy grew for the 107th consecutive month in the U.S. Of the 18 manufacturing industries, 17 reported growth in March of 2018.”
CLICK HERE to access Q1 2018 San Diego MarketBeat Industrial Report summary.
CLICK HERE to access Q1 2018 San Diego Industrial Market Statistics by Submarket (historical)
About Cushman & Wakefield
Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.