Behind the Numbers
> Combined industrial/R&D vacancy dropped to the lowest rate ever recorded (4.5%).
> 2017 will be the second most active year for new industrial and R&D construction since the end of the recession (914,835 SF).
> After reaching an all-time high last quarter, average asking rental rates for industrial/R&D dipped by $0.03 to a triple-net rate of $1.00/SF/month.

Trend Forecast
The San Diego County vacancy rate has been consistently between 4.5% and 5.0% for the past two years. It has stayed in this range because the last seven quarters have seen a balance between supply and demand: 2.7 million SF of net absorption along with 2.1 million SF of new construction. Vacancy will likely break the 4.5% threshold at year-end. The lowest historical rate was 4.9% recorded nearly twenty years ago (Q4 1997). In 2018, construction completions will reach its highest level in 11 years – over 2.1 million SF. Over 81% of this space is speculative construction.

Depending on how much of this new space gets leased next year, vacancy could fluctuate between 4.5% and 5.0% countywide.

Vacancy
Countywide combined industrial/R&D vacancy dipped to 4.5% – a 20 basis point (bps) decrease from the prior quarter. Only 6 of the 21 submarkets countywide posted vacancy higher the county average.

Only Campus Point/Eastgate (18.2%) posted a double-digit vacancy rate. Campus Point/Eastgate vacancy is entirely comprised of R&D space, but positive demand even caused this submarket to see slight vacancy rate improvement of 49 bps during the quarter.

All submarkets continue to remain under 9% vacancy rates for their industrial, non-R&D, inventories. Total vacancy of 3.5% for industrial space decreased 6 bps at the end of Q3 2017 compared to the prior quarter. Countywide R&D vacancy decreased by 59 bps to 7.2%.

Net Absorption
Combined industrial/R&D net absorption totaled 522,609 SF countywide in Q3 2017. Industrial buildings (manufacturing, warehouse, distribution and multi-tenant/incubator uses) and R&D buildings (flex, wet lab and R&D uses) posted positive net absorption in of 211,564 SF and 311,045 SF, respectively.

Demand was positive in most submarkets in Q3, with the most recorded net absorption in Rancho Bernardo (+219,074 SF) for a second consecutive quarter. Additionally, Sorrento Mesa (+133,905 SF), Carlsbad (+97,213 SF) and Poway (+92,485 SF) rounded out the top four submarkets.

In Rancho Bernardo, Amazon occupied 180,946 SF at 16550 Via Esprillo. In Sorrento Mesa, Presidio Components occupied the 20,000 SF building at 10250 Camino Santa Fe, which they acquired in Q2. Hologic occupied a 20,433 SF sublease at 9393 Waples Street. In Carlsbad, Acoustic Ales (27,457 SF) and Room & Board (25,059 SF) moved into two buildings on Innovation Way in Bressi Ranch. For a second quarter, General Atomics has occupied new space in Poway. In Q3, General Atomics occupied a newly built 82,640 SF building at 11905 Community Road. 

Oceanside (-61,879 SF) posted the most negative net absorption of the submarkets. In addition to several smaller multi-tenant vacancies, CORE Supplement Technology vacated 28,900 SF at 2614-2616 Temple Heights Drive.

New Supply
A total of 138,213 SF was completed in Q3. Badiee Development completed the 55,573 SF Innovation Ridge at 3248 Lionshead Avenue. Additionally, Techbilt Companies completed the 82,640 SF Poway Corporate Center building at 11905 Community Road which was occupied by General Atomics.

There was an additional 1.96 million SF under construction of which 63,900 SF will be completed by year-end. In Q4, Techbilt will be completing a 63,900 SF building in Carlsbad Oaks East Business Park at 2800 Loker Avenue East.