The San Diego industrial market saw rising rates of vacancy and rent rates in the fourth quarter of last year. The Cushman & Wakefield San Diego Industrial Marketbeat report for Q4 2023 shows vacancy rates in San Diego increased by 70 basis points quarter-over-quarter and 200 basis points year-over-year to reach 4.4 percent in the last quarter of 2023. New construction in Otay Mesa contributed 608,000 square feet to the vacancy rate without pre-leasing, marking a shift in market dynamics.
The data comes on the back of San Diego experiencing employment growth in the last quarter of 2023, with total non-farm employment expanding by 21,900 jobs or 1.4 percent year-over-year between November 2022 and November 2023. The transportation and warehousing sector outpaced others with a 6.1 percent year-over-year increase, while the manufacturing and wholesale trade sectors faced moderate declines. Overall, despite a four-quarter trend of occupancy losses following a prolonged period of gains, the overall vacancy rates for all product types in the last quarter of 2023 remained below pre-pandemic levels.
However, the South County witnessed an increase in vacancy for warehouse and distribution space to 7.3 percent, attributed to a surge in construction activity. According to the report, large industrial users such as Viasat and Ajinomoto Foods announced layoffs in the fourth quarter, impacting leasing and renewal activities.
The average overall asking rent for all product types in San Diego reportedly rose by almost three percent quarter-over-quarter and 3.3 percent year-over-year, reaching $1.48 per square foot per month. Incubator multi-tenant and warehouse/distribution spaces experienced significant year-over-year rent increases of 13.8 percent and 6.3 percent, respectively. Despite the increasing sublease space, overall and direct asking rents are at an all-time high, with landlords demanding annual increases of four percent or more.
Nearly 3.3 million square feet of industrial space was under construction countywide as of the last quarter of 2023, with the majority concentrated in Otay Mesa. Approximately 2.3 million square feet of warehouse space is expected to be delivered by the end of 2024, followed by another million square feet in 2025. Cushman & Wakefield notes that the limited availability of large blocks of space has led larger users to actively engage with developers and landlords for speculative new construction and potential build-to-suit sites.
Tenant demand remains robust, with the requirement of over 5.2 million square feet anticipated in the next 24 months across all sizes. The report shows that manufacturing continues to be a significant driver of demand with select expansion requirements still active in the market despite a slowdown in e-commerce demand compared to 2020 and 2021.
Cushman & Wakefield concludes that the industrial real estate landscape in San Diego is undergoing a transformation, influenced by changing employment patterns, supply and demand dynamics and pricing trends. As tenants reassess their real estate footprints post-pandemic, the company expects the leasing activity for spaces over 50,000 square feet is expected to drive market activity.
