Behind the Numbers
> Vacancy continues to remain at historically low levels (4.2%).
> The remainder of 2018 will see the highest level (2.6 million SF) of new construction completions since 2007.
> Average asking NNN rental rates are currently $1.00/SF/month, remaining unchanged from the prior two quarters. Rates are not expected to increase significantly throughout 2018 due to new supply completions.
Combined Industrial/R&D net absorption in San Diego County totaled 540,728 SF during Q1 2018. 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 of 469,254 SF and 71,474 SF, respectively.
Demand was positive in 15 of the county’s 21 submarkets in Q1 2018. Otay Mesa posted the greatest net absorption (+161,335 SF) for the quarter. Otay Mesa’s demand was driven in part by several tenants occupying space including the relocation of kSARIA (+59,267 SF) from Chula Vista and a new location for the GSA (+40,872 SF), both into 2055 Sanyo Avenue. HS Supplies (+15,200 SF) moved into 9850 Siempre Viva Road.
Carlsbad (+143,463 SF), Campus Point/Eastgate (+123,951 SF) and South Bay (+94,434 SF) rounded out the other top submarkets in Q1 based on demand. In Carlsbad, Cal-Comp USA (38,500 SF) occupied 1940 Camino Vida Roble and RA Medical Systems (32,001 SF) moved into 2070 Las Palmas Drive. Amazon occupied 84,550 SF at 10300 Campus Point Drive in the Campus Point/Eastgate submarket. South Bay demand was supplemented by SDSU Foundation (13,349 SF) occupying 780 Bay Boulevard in Chula Vista and Go Energistics (22,543 SF) moving into 1330 30th Street in San Ysidro.
Other significant occupancies in Q1 included VER (18,592 SF) moved into 9510-9516 Chesapeake Drive in Kearny Mesa, iMatrix (25,203 SF) occupied 5550 Morehouse Drive in Sorrento Mesa and Enaqua (18,724 SF) moved into 1350 Specialty Drive in Vista.
Countywide combined industrial/R&D vacancy improved slightly to 4.2% – a 12 basis point (bps) decrease from the prior quarter. Direct vacancy made up 3.8% of the inventory while sublease vacancy stood at 0.4%. All submarkets – with the exception of Campus Point/Eastgate (12.9%) – maintain vacancy rates below 8%. Countywide vacancy in the industrial building base decreased 10 bps from last quarter to 3.0% whereas R&D vacancy dropped 14 bps to 7.2%.
Otay Mesa has been one of the most improved submarkets since the end of the recession. While the submarket did post the most absorption in Q1, vacancy increased slightly (22 bps) to 7.1%. This increase was precipitated by the 208,985 SF building at 2055 Sanyo Avenue being added to the inventory after undergoing major renovations last year. While there was significant absorption in the building as noted earlier, nearly 50% of the building remained vacant at the end of Q1. This caused the overall vacancy in the market to slightly increase.
124,581 SF of new construction was completed in Q1 2018. This was comprised of the first of four buildings in Industrial Property Trust‘s Pacific Coast Collection located in Oceanside at 1319 Rocky Point Dr.
There was 2.9 million SF under construction throughout the county at the end of Q1. Approximately 91% of this new construction is projected to be completed by year-end. There has not been this much space under development in more than a decade. Less than a third of this new construction has either been pre-leased or is build-to-suit.
As this new construction completes throughout the year, we can expect vacancy to rise – assuming current levels of demand – to just under 5% by year-end. There is an additional 5.2 million SF of proposed space for future development, some of which could break ground in 2018 if demand conditions remain strong.
Trends, Forecast & Outlook
The San Diego County vacancy rate has been in the 4% range for the last three years; it is currently at its lowest rate ever. Depending how strong demand will be for new construction hitting the market, vacancy will likely fall within the 4.5% to 5.0% range countywide by the end the year.
Average asking rental rates have remained flat over the past year and are not expected to increase much by year-end. The one place where rental rate increases will occur is in North County – a market that has been the dominant location for new development.
While all areas of the county have recently had strong demand and low vacancy, 60% of the current space under construction is concentrated in North County. This new space has average asking rental rates are 5% higher than the countywide average.
The rental rate premium on new construction is justified by rising construction costs and highly-amenitized space. The higher rents on new space will counter the unchanging asking rental rates on the existing vacant inventory, thereby moving overall rates by no more than 2% or 3% across the county by year-end.