Behind the Numbers
- Vacancy increased slightly to 5.1% (+0.2%) as new construction completions (1.13 million SF) outpaced demand (+424,405 SF).
- More than 2.74 million SF of new construction is slated for completion in 2019 – the most product built since 2007.
- Countywide average asking NNN rental rates bumped up $0.03 during Q1 to stand at $1.17/SF/month – a 17% year-over-year increase.
Combined Industrial/R&D net absorption in San Diego County totaled 424,405 SF during Q1 2019. Industrial buildings (manufacturing, warehouse, distribution and multi-tenant/incubator uses) posted 395,607 SF of positive net absorption and R&D buildings (flex, wet lab and R&D uses) posted positive net absorption of 28,798 SF.
Otay Mesa posted the greatest net absorption (+408,857 SF) for the quarter. Trident Maritime Systems (+182,910 SF) and Mainfreight (+33,116 SF) occupied newly completed buildings in Q1. Trident vacated 111,644 SF in another building in Otay Mesa, creating a net expanded tenancy of 71,266 SF in the submarket. Other large tenant occupancies included CareFusion (+97,200 SF), Biotix (+94,315 SF), RC Freight (+60,596 SF), and Vmaco (+21,974 SF).
The North County submarkets of Carlsbad (+363,256 SF) and Oceanside (+51,282 SF) had the second and third highest levels of absorption during the quarter. In Carlsbad, PODS (+121,093 SF) a newly completed building in Pacific Vista Commerce Center. Other major Carlsbad move-ins included Zodiac (+106,122 SF) and DPR Construction (+27,464 SF). In Oceanside, owner-user Sadie Rose Baking Company occupied a 28,900 SF building at 2614-2616 Temple Height Drive.
Other notable move-ins included General Atomics (+65,755 SF) in Rancho Bernardo, Carbon by Design (+49,384 SF) in Vista, and Anderson Windows (+22,099 SF) in Miramar. The largest block of space vacated during the quarter was by Takeda Pharmaceuticals (-93,819 SF) at 10410 Science Center Dr. Takeda relocated to a new office building in UTC during the quarter creating a net expansion of 56,181 in market area.
Countywide combined industrial/R&D vacancy stood at 5.1% at the end of Q1 - a 17 basis points increase from the prior quarter. Direct vacancy made up 4.7% of the inventory, while sublease vacancy stood at 0.4%.
Campus Point/Eastgate (10.4%) and Carlsbad (10.1%) were the only submarkets with double-digit vacancy rates. The increase in Carlsbad’s vacancy was driven by new construction completed in Q1, while Campus Point/Eastgate’s vacancy was concentrated exclusively in life science and wet lab space. Of the major market areas countywide, only North County had vacancy over 6%. This market will see its vacancy drop as new construction in Carlsbad and Oceanside continues to absorb over the next nine months of the year. East County was the tightest submarket with an overall vacancy of 1.7%.
1.13 million SF of new construction was completed in Q1 2019. In Carlsbad, Ryan Companies’ three-building 417,478 SF Pacific Vista Commerce Center was completed. PODS preleased a 121,093 SF building and occupied it upon completion. RAF Pacifica Group’s 146,108 SF “cre•ate” at 2827 Whiptail Loop West was completed as well. In Miramar, First Industrial Realty Trust completed a 22,099 SF building at 8572 Spectrum Ln that was occupied by Anderson Windows. Oceanside saw the completion of Pacific Coast Collection – a 277,793 SF three-building project developed by Industrial Property Trust and located on Rocky Point Dr. In Otay Mesa, Trident Maritime Systems occupied 182,910 SF at IDS Real Estate Group’s Frontera Business Park at 2651 Drucker Ln. Mainfreight occupied 33,116 SF in Murphy Development Company’s Building 17 of the Siempre Viva Business Park – a 79,050 SF distribution building at 8500 Kerns Street.
At the end of Q1, there was 1.78 million SF under construction throughout the county. Approximately 1.62 million SF of that is expected to be completed by year-end, potentially bringing total completions to 2.74 million SF.
Trends, Forecast & Outlook
The San Diego County vacancy rate has been in the 4% range for the four years leading up to Q3 2018, when it reached its lowest rate ever (4.2%). Over the past six months, the vacancy rate increased by less than a percentage point due to increased construction completions of nearly 2 million SF, while net absorption was over half a million SF. By year-end, the vacancy will continue increasing a small amount as new construction gets completed, but it is expected to remain below 6%.
Average asking rental rates surged in Q4, increasing to $1.17/SF/month. This was the fourth consecutive quarter of increases after remaining flat in the prior three quarters of Q3 2017 through Q1 2018. This trend of increasing rents is expected to continue as long as vacancy remains at historically low levels.