Behind the Numbers 

> Vacancy remains at historically low levels (4.4%), but will post a slight increase by year-end with new construction completions.
> The remainder of 2018 will see the highest level (3.2 million SF) of new construction completions since 2001.
> Countywide average asking NNN rental rate experienced its most significant single-quarter increase of $0.05/SF and is currently $1.05/SF/month.

Net Absorption

Combined Industrial/R&D net absorption in San Diego County totaled 114,333 SF during Q2 2018. Industrial buildings (manufacturing, warehouse, distribution and multi-tenant/incubator uses) posted negative net absorption of 32,397 SF; R&D buildings (flex, wet lab and R&D uses) posted positive net absorption of 146,730 SF.

Torrey Pines posted the greatest net absorption (+175,912 SF) for the quarter, all of which was in wet lab/R&D space. Torrey Pines’ demand was driven in part by Vertex Pharmaceuticals’ occupancy of a new 170,523 SF build-to-suit at 3215 Merryfield Row and Fate Therapeutics’ occupancy of 24,197 SF at 3535 General Atomics Court.

Carlsbad (+71,516 SF) had the second highest level of net absorption. USAopoly occupied 25,028 SF at 5999 Avenida Encinas; Ionis Pharmaceuticals (18,710 SF) and Glass Warehouse (8,684 SF) both occupied space in RAF Pacifica Group’s Elevate project in the Carlsbad Oaks North Business Park. A significant move-out occurred when Nortek Security & Control vacated 53,022 SF at 1950 Camino Vida Roble. However, they expanded into 88,858 SF at 5919 Sea Otter Place – a building that was reconverted into an office building in 2016 – giving the Carlsbad office market a significant absorption boost.

Other significant occupancies in Q2 included LRAD occupying 54,964 SF at 16262 W Bernardo Drive in Rancho Bernardo; Vision Systems (+50,000 SF) occupying a build-to-suit at 11322 N Woodside Ave in Santee; Tocagen moving into 38,849 SF at 4242 Campus Point Ct in Campus Point/Eastgate; owner-user Bargain Bazaar occupying a recently purchased 24,000 SF
building at 388 W Calle Primera in San Ysidro; and TGG Accounting occupying 23,000 SF at 6162 Nancy Ridge Drive in Sorrento Mesa.

Vacancy

Countywide combined industrial/R&D vacancy bumped up slightly to 4.4% – a 17 basis point (bps) increase from the prior quarter. Direct vacancy made up 4.1% of the inventory, while sublease vacancy stood at 0.4%. Countywide vacancy in the industrial building base increased 22 bps from last quarter to 3.2%, whereas R&D vacancy increased 2 bps to 7.6%.

Campus Point/Eastgate is the only submarket with a double-digit (13.2%) vacancy rate. Additionally, more than half the submarkets in the county have vacancy rates under 4%. While new construction coming online in 2018 and 2019 will likely put countywide vacancy slightly over 5%, a slowing supply of the future construction pipeline will adjust the vacancy back down in the mid to low-4% range by 2020 or 2021.

New Supply

457,058 SF of new construction was completed in Q2 2018. The largest building completed was Vector, a 172,655 SF spec building completed by RAF Pacifica Group at 2882 Whiptail Loop E in Carlsbad that is fully available. Also in Carlsbad, a 63,900 SF spec building was completed at 2820 Loker Avenue E. Previously mentioned for noteworthy absorption, Alexandria Real Estate
Equities completed a 170,523 SF build-to-suit for Vertex Pharmaceuticals in Torrey Pines and Hamann Construction completed a 50,000 SF build-to-suit for Vision Systems in Santee.

There was 3.1 million SF under construction throughout the county at the end of Q2. Approximately 78% of this new construction is projected to be completed by year-end, and when added in with product completed in the first half of the year, nearly 3.2 million SF will be completed in 2018. This will put 2018 construction levels on par with 3.1 million SF completed in 2006 - a couple of years before the recession - yet still the most active year in the last 17 years (3.4 million SF in 2001).

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 completions – including build-to-suits and preleased space – vacancy will likely fall within the 4.8% to 5.2% range countywide by year-end, with net absorption estimated to be in the 1.5 to 2.0 million SF range.

Average asking rental rates have remained flat over the past year but increased by 5% in Q2. This bump comes after nearly three years of a relatively unchanged countywide average. Steady countywide demand will continue to influence further rent increases, however with the large amount of new construction completions, it may check rents from increasing too
significantly.