Behind the Numbers
- An anticipated increase in vacancy during Q4 (4.8%) was caused by 834,381 square feet (SF) of new construction completed in the last three months of the year.
- 2018 had the highest level (2.47 million SF) of new construction completions since 2007.
- Countywide average asking NNN rental bumped up $0.06 during Q4 to stand at $1.14/SF/month – a 14% year-over-year increase.
Combined Industrial/R&D net absorption in San Diego County totaled 233,207 SF during Q4 2018. This contributed a modest amount to the 1.77 million SF of net absorption for all of 2018. Industrial buildings (manufacturing, warehouse, distribution and multi-tenant/incubator uses) posted 274,949 SF of positive net absorption while R&D buildings (flex, wet lab and R&D uses) posted negative net absorption of 39,742 SF.
Carlsbad posted the greatest net absorption (+314,794 SF) for the quarter. Camston Wrather (+128,402 SF) and San Diego Hat Company (+83,000 SF) occupied newly completed buildings in Q4. Owner/user Bergelectric purchased a 26,819 SF building at 3182 Lionshead Ave. Fujikura Golf occupied 11,935 SF at 1819 Aston Ave.
Vista had the second highest level of absorption (+153,197 SF) during Q4 while San Marcos (+72,720 SF) and Poway (+72,672 SF) tied for third. In Vista, Amazon leased the 157,176 SF building at 1395 Park Center Dr, Surf Hardware International occupied 29,822 SF at 1255 Keystone Way, and Everest Solar Systems moved into 18,190 SF at 2835 La Mirada Dr. In Poway, Coleman World Group occupied a newly completed 61,000 SF build-to-suit and The Rinks subleased 19,565 SF at 12455 Kerran St. In San Marcos, LTD Online Stores occupied 38,680 SF at 260 S. Pacific St and MBM Builders purchased a 24,225 SF building at 288 Distribution St.
A few submarkets experienced decreased demand in Q4. Sorrento Mesa (-143,984 SF), East County (-116,736 SF), and Kearny Mesa (-95,475 SF) posted the most negative net absorption. At 10015 Waples St in Sorrento Mesa, Covan vacated 106,412 SF. East County saw the move-out of EagleBurgmann (-71,486 SF) in Lakeside. Brightwood College went out-of-business in December 2018, affecting several campus locations including 53,268 SF at 9055 Balboa Ave in Kearny Mesa.
Countywide combined industrial/R&D vacancy stood at 4.8% at the end of Q4 - a 29 basis points increase from the prior quarter. Direct vacancy made up 4.5% of the inventory, while sublease vacancy stood at 0.4%.
Campus Point/Eastgate (11.0%) was the only submarket with a double-digit vacancy rate. Thehalf-millionsquarefeetof vacantspaceinCampusPoint/Eastgate is entirely comprised of specialized wet lab, life science, and R&D space.
834,381 SF of new construction was completed in Q4 2018. In Carlsbad, RAF Pacifica Group’s two-building 227,351 SF “dis.trib.ute” spec project was completed. Hamann Construction completed a 128,402 SF building that was leased to Camston Wrather and an 83,000 SF build-to-suit was completed for San Diego Hat Company, both on Whiptail Loop. Kearny Mesa saw the completion of a 62,600 SF spec building at 9269 Lightwave Ave, developed by BLT Enterprises. RAF Pacifica also completed the four-building 222,028 SF “pro.duc.tion” spec project on Norman Strasse Rd and Bosstick Blvd in San Marcos. The aforementioned 61,000 SF build-to-suit for Coleman World Group was completed at 13610 Stowe Dr in Poway.
There was 1.83 million SF under construction throughout the county at the end of 2018. All of the space is expected to be completed during 2019, most of which will be completed in the first half of the year. Barring any economic slowdown, we can expect more projects to break ground during the year, pushing development to exceed 2018’s total.
Trends, Forecast & Outlook
The San Diego County vacancy rate has been in the 4% range for the last four years, with Q3 2018 dropping to its lowest rate ever (4.2%). The increase to 4.8% was tied to the additional new construction that was completed in Q4. Over the next couple of quarters, we can expect it to continue to increase for the same reason, taking into consideration that less than a third of the 1.83
million SF currently under construction is preleased or build-to-suit. This will likely bring vacancy up to the low-5% range even if net absorption continues to be strong.
Average asking rental rates surged in Q4, increasing to $1.14/SF/month. This was the third consecutive quarter of increases after remaining flat in the prior three quarters of Q3 2017 through Q1 2018. Steady countywide demand coupled is expected to continue to influence further rent increases.