Behind the Numbers

  • Vacancy stands at historically low levels (4.4%), but will slightly increase at year-end as nearly 1.57 million SF of new construction completes in Q4.
  • 2018 will see the highest level (3.16 million SF) of new construction completions since 2001. Of that total, 46% – or 1.46 million SF – is pre-committed space that has been preleased, recently occupied, or build-to-suit.
  • Countywide average asking NNN rental bumped up $0.03 during Q3 to stand at $1.08/SF/month. This amounted to an 8% year-over-year increase in asking rents.

 

Net Absorption

Combined Industrial/R&D net absorption in San Diego County totaled 1.24 million SF during Q3 2018. This was the strongest quarter of net absorption since Q2 2015 (1.37 million SF). 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 1.04 million SF and 197,104 SF, respectively.

Otay Mesa posted the greatest net absorption (+317,403 SF) for the quarter. Three large tenants absorbed 284,497 SF in buildings that were completed in Q3 (see New Supply section). Additionally, Man Crates moved into 44,674 SF at 7520 Airway Rd and Exponents Insta USA occupied 30,827 SF at 9485 Customhouse Plaza.

Escondido (+251,746 SF) and Poway (+242,664 SF) had the second and third highest level of net absorption, driven primarily by Veritiv occupying 212,088 SF in a new building completed in Escondido and General Atomics occupying 302,500 SF in three new buildings in Poway (see New Supply section). Additionally, Nuera Group occupied a building they purchased at 12150 Flint Pl in Poway, relocating from leased space in Rose Canyon/Morena.

Rancho Bernardo benefited from strong absorption (+138,120 SF), which included LRAD (+54,964 SF) moving to 16262 W Bernardo Drive, Crown BioScience (+32,306 SF) occupying 16550 W Bernardo Dr, and Shred- It (+29,093 SF) moving to 12316 World Trade Dr. Vista (+117,295 SF) had Accutek Packaging occupy 110,500 SF in a building they purchased at 2980 Scott St, while vacating 63,396 SF at 2685 S. Melrose Dr. Vista Industrial Products also moved into 67,476 SF at 3210 Executive Ridge Drive.

Very few submarkets had any significant levels of negative activity. Sorrento Mesa (-137,049 SF) was most notable, with Cal-Comp USA vacating 62,392 SF at 9877 Waples St. Five other submarkets had negative net absorption of less than 22,000 SF each, comprised of mostly smaller tenant move-out activity.

 

Vacancy

Countywide combined industrial/R&D vacancy stood at 4.4% at the end of Q3 - a 21 basis points decrease from the prior quarter. Direct vacancy made up 4.0% of the inventory, while sublease vacancy stood at 0.4%.

Campus Point/Eastgate is the only submarket with a double-digit (11.0%) vacancy rate, all of which is concentrated in specialized wet lab, life science and R&D space. Additionally, 12 of the 20 submarkets in the county have vacancy rates under 4%. While new construction coming online by year-end and into early 2019 will likely push countywide vacancy up slightly, a slowing supply of the future construction pipeline will keep the vacancy below 5% throughout 2019 and 2020.

 

New Supply

873,842 SF of new construction was completed in Q3 2018. In Miramar, a 30,000 SF build-to-suit at 7120 Miramar Rd was completed for Bedrosian Tile & Stone. Veritiv moved into a 212,088 SF building developed by Exeter Property Group and Badiee Development at 1925-2005 Harmony Grove Rd in Escondido. General Atomics moved into the three-building 302,500 SF Ridgeview Business Park developed by HCP on Kirkham Way in Poway. Industrial Property Trust completed two new buildings totaling 268,454 SF on Enrico Fermi Pl in Otay Mesa. Zucarmex USA occupied one building totaling 198,858 SF and MSE Express America occupied 24,839 SF in the other building. Finally, 60,800 SF at 1604 Cactus Rd – also in Otay Mesa – was completed and occupied by Mission Imprintables.

There was 2.58 million SF under construction throughout the county at the end of Q3. Approximately 61% of this new construction is projected to be completed by year-end, and when added in with product completed up through Q3, nearly 3.16 million SF will be completed in 2018. This will be the most active year for new development in the last 17 years (3.44 million SF in 2001). 

 

Trend, 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. Vacancy will increase due to the additional new construction that will be completed in Q4. Currently, 18% of that space is preleased or build-to-suit, the remainder of which will add some significant vacant space to the overall inventory. Along with continued robust demand, this will push vacancy into the 4.8% to 5.2% range countywide by year-end, with net absorption estimated to exceed 2 million SF.

Average asking rental rates had remained relatively flat for three years up until the middle of this year, when it went from $1.00/SF to $1.05/SF. In Q3, the rate went to $1.08/SF, amounting to an 8% increase over a six-month period. Steady countywide demand coupled with higher rents in new construction will continue to influence further rent increases.