Behind the Numbers
> The year ended at the lowest level of vacancy ever recorded (4.2%).
> 2018 is poised to be the strongest year for new construction in 19 years.
> Average asking rental stood at a triple-net rate of $1.00/SF/month which was unchanged from the prior quarter. Newly constructed buildings coming online in 2018 will push rates up after being flat for several quarters.
Net Absorption - Q4 2017
Combined industrial/R&D net absorption in San Diego County totaled 592,245 SF during Q4 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 571,717 SF and 20,528 SF, respectively.
Demand was positive in five of the county’s 21 submarkets in Q4 2017. South Bay posted the greatest net absorption (+207,665 SF) for the quarter. South Bay’s demand was driven in part by several tenants occupying space in Chula Vista including kSARIA (49,600 SF) at 491 C Street; Tecnico Corporation (25,469 SF) and Curbell Plastics (25,600 SF) at 1670 Brandywine Avenue; and MTE Corporation (23,765 SF) at 730 Design Court.
Campus Point/Eastgate (+129,119 SF), Otay Mesa (+62,921 SF) and Poway (+62,060 SF) rounded out the top submarkets in Q4 based on demand. La Jolla Pharmaceutical occupied 83,008 SF at 4550 Towne Centre Court in Campus Point/Eastgate. In Otay Mesa, Atlas Freight (99,840 SF) occupied 2020 Piper Ranch Road and Mainfreight (24,050 SF) occupied 2600 Melksee Street. In Poway, owner/user O’Brien’s Boulangerie bought the 17,656 SF building at 13615 Stowe Drive and DirectMed Parts & Services (33,652 SF) occupied 12525 Stowe Drive.
Net Absorption - 2017 Summary
Combined industrial/R&D demand for the year reached 2.14 million SF of net absorption. This is significantly high demand considering the diminishing base of available vacant space.
In 2017, nine submarkets posted positive net absorption of more than 100,000 SF. The top markets included Rancho Bernardo (+419,135 SF), Campus Point/Eastgate (+411,858 SF) and Sorrento Mesa (+315,477 SF).
Countywide combined industrial/R&D vacancy dipped to 4.2% – a 31 basis point (bps) decrease from the prior quarter. Campus Point/Eastgate (15.5%) was the only submarket to end the year with double-digit vacancy rate. However, this primarily life-science based submarket had both the second highest level of net absorption for the year and improvement in vacancy – a 593 basis point (bps) drop – from a year ago.
At year-end, all submarkets maintained vacancy rates under 8% for their industrial, non-R&D, inventories. Total vacancy of 3.0% for industrial space decreased 42 bps compared to the prior quarter. Countywide R&D vacancy decreased by 3 bps to 7.3%.
850,935 SF of new construction was completed in 2017 but none of it was completed in Q4. Demand within the newly built space led to 730,269 SF of net absorption – or 86% of total completed for the year.
There was more than 2.81 million SF under construction throughout the county at the end of 2017; all but 130,000 SF is expected to be completed in 2018. It has been more that eleven years since this amount of space has been under development at any one time.
The amount of proposed (future) development stood at 4.74 million SF. Potentially 2.76 million SF of this total could break ground and be completed during 2018. A combination of some proposed space and all the space under construction could conceivably make 2018 the most active year for new construction in 18 years.
Trends, Forecast & Outlook
The San Diego County vacancy rate has been in the 4% range for the last three years. Demand is likely to continue to be steady in currently existing product. Depending how strong demand will be for new construction hitting the market, vacancy should fall within a range of 3.9% to 5.1% countywide by the end of 2018.
Average asking rental rates will likely increase in 2018 as brand new, high-quality projects come online. These new projects will set the high point for rents and dominate the already tight market where available, leasable space in pre-existing projects continues to be limited.