Industrial demand is continuing to grow in San Diego, with the market recently reporting its strongest quarter on record. According to a San Diego third quarter market report from CBRE, net absorption exceeded the year-to-date absorption rate of any previous year on record during the third quarter, indicating the strength of the market .
According to CBRE, net absorption during the third quarter reached 4.7 million square feet, nearly triple the amount absorbed during the previous quarter. Leasing activity also reached 6.6 million square feet, a growth of two million square feet quarter-over-quarter. At the same time, the vacancy rate was just 2.7 percent.
“The low countywide vacancy rate of 2.7 percent makes it very difficult to be a tenant,” Sean Williams, first vice president with CBRe, said. “Options are really limited and spaces that do become available see multiple offers. The demand is far out weighing the supply. This competitive environment is pushing rental rates and shrinking concessions. Tenants are in a tough position where if they have a need for space, they need to do whatever it takes to secure it.”
In addition, the report showed that more than 90 percent of the 3.7 million square feet of industrial product delivered during the third quarter was preleased, further contributing to the record net absorption rate and showing the high level of demand in the sector. In total, the availability rate of iIndustrial product in San Diego was just five percent, the lowest on record.
Despite the tight market, new leasing was prominent throughout San Diego, and nearly every submarket saw positive net absorption. Of these submarkets, Otay Mesa led in both leasing activity and net absorption, which was largely due to the delivery of Amazon’s new 3.4 million square-foot industrial campus. Overall, the submarket recorded 3.5 million square feet in leasing activity and 3.2 million square feet in net absorption.
Sorrento Valley also performed well due to the large number of life science tenants in the submarket. According to the report, Sorrento Valley saw 212,046 square feet in positive net absorption and reported 277,156 square feet of leasing activity. Of the leases signed in Sorrento Valley, one of the largest was by Shoreline Bioscience. The lease is for 46,816 square feet at an industrial facility at 10240 Sorrento Valley Road.
Other major leases signed throughout the region include Dynalectric’s lease for the entire 110,663 square-foot building at 111 Pioneer Way in El Cajon and Youngsun Home Improvement’s 82,781 square foot-lease at 6955 Consolidated Way in Miramar. Amazon also preleased Kearny Mesa Logistics Center, a 315,000 square-foot warehouse building, which will not be delivered until 2022.
“Industrial activity is well balanced between demand for lab space that can accommodate the rapidly growing life science industry and logistics space that can satisfy the needs of last-mile distribution and e-commerce users. Other large deals were common across the county from a diverse mix of tenants,” the report stated.
Leasing activity is anticipated to remain high as developers race to put out more industrial product. During the third quarter, construction activity reached 5.94 million square feet, which was about one million less than the previous quarter due to limited space. Construction during the third quarter also included a large amount of distribution and lab space for life science tenants. For instance, IQHQ began the first phase of construction at its Research and Development District, located along the waterfront in downtown San Diego. Once completed, the project will total approximately 1.6 million square feet. Additionally, IDS broke ground on another new warehouse for Amazon. Located at 7144 Otay Mesa Road, the warehouse will add 700,000 square feet of industrial space to the region.
Industrial demand is anticipated to continue increasing in San Diego, with job growth acting as a major contributor. According to CBRE, San Diego employers added 59,200 jobs year-over-year, increasing the overall employment rate by 4.4 percent. Industrial users are also at near pre-pandemic levels, down 0.5 percent, or approximately 1,800 jobs since August of 2019. In the past year, San Diego’s industrial sector added approximately 11,600 jobs. This is only expected to continue, with major research and life science development companies leading the way.
“Looking forward to 2022, I think we will see much the same of 2021. Space will remain tight, limiting options. Rents will continue to rise based on supply vs. demand. Sites thought to be challenged due to location, topography, existing functionally obsolete structures will become acquisition targets for redevelopment and will likely contribute to the 2022 sales volume,” Williams said. “Overall I think there may be a plateauing of activity metrics (limited new construction coupled with limited vacancy make it difficult for new absorption and robust leasing activity) but believe in the industrial market fundamentals being stable for the foreseeable future.”
