Q2 2012 San Diego, California Industrial Market Trends

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Q2 2012 San Diego, California Industrial Market Trends

Market watchers were using the word “recovery” to explain how the San Diego industrial market was holding on as 2012 began. Now words like “resurgence” and “steady progress” are seen. Some sources differ on the extent, but the general picture is of an industrial market that is showing new strength as the second quarter progresses. Voit Real Estate Services reports the market “continued its path to recovery in the second quarter.”

OCCUPANCY


Reis reports a 12.3% vacancy rate for 69.6 million square feet of warehouse/ distribution space in San Diego County in the second quarter of 2012, down 20 basis points from the prior quarter, and down 40 from one year earlier. For 38.7 million square feet of Flex/R&D space, Reis reports a second quarter vacancy rate of 16.9%, down 10 basis points from the prior quarter and down 90 over 12 months. Reis expects warehouse/distribution space vacancy to finish 2012 at 12.0%, eventually declining to 11.3% by the end of the forecast period. Flex/R&D space is forecast to finish the year unchanged from the current level, with minimal annual declines afterward.

Cushman & Wakefield’s second quarter report states “overall vacancy” improved, “dropping to 10.4%, down from 11.1%” the prior quarter. The rate is down 120 basis points year-over-year. Cushman reports Manufacturing & Warehouse vacancy at 9.5%. This source reports R&D vacancy at 12.6%. Colliers reports an overall second quarter vacancy rate of 10.5%, down 75 basis points in the second quarter. “The industrial and R&D components measured 9.1% and 14.0%, respectively,” this source noted. Voit reports a “modest” vacancy rate of 7.84%, “the lowest level since Mid-2009.” “Total vacancy for all product types, including sublease space, was 10.6%—a level not seen since the first quarter of 2009 (10.3%),” notes Cassidy Turley’s second quarter report.

SUPPLY AND DEMAND


San Diego County industrial construction remains quiet. There was only one Flex/R&D and one warehouse/ distribution completion in 2011, at 176,000 square-feet and 26,000 square feet, respectively. Reis reports the construction and projected November 2012 completion of the 21,000-square-foot Central Receiving and Distribution Center (CRDC) near the San Diego airport, and the J. Craig Venter Institute, a 45,000-square-foot research center set for completion in 2013. Net absorption was positive in the second quarter. Warehouse/distribution space posted negative 80,000 square feet in the first quarter of 2012, but the second quarter followed with positive 131,000 square feet. For Flex/R&D space, demand fell to 10,000 square feet in the second quarter, after first quarter’s considerably better 136,000 square feet. Net absorption had been strong in 2011 at 560,000 and 460,000, respectively. With little new supply, Reis forecasts 2012 net absorption to be lower at 336,000 square feet for warehouse/distribution and 189,000 square feet for Flex/R&D.

“Both the manufacturing/warehouse and research & development sectors experienced improvements in the second quarter,” according to Cushman & Wakefield. This source reports manufacturing/warehouse net absorption at 640,210 square feet “Net absorption in the R&D sector, which has been slower to recover due to competition from low rents among the office sector, reached 4,688,494 square feet in the second quarter,” this source reports. “This quarter marked the fourth consecutive quarter of positive countywide net absorption for the industrial product type,” according to Cassidy Turley. This source reports a total countywide net absorption of 484,035 square feet. Colliers reports “stellar” net absorption in the second quarter. “San Diego County’s industrial/R&D continued its fourth straight quarter of positive demand with an outstanding 1.16 million square feet of net absorption,” this source reported. “The San Diego industrial market posted 165,816 square feet of positive net absorption in the second quarter, making nine straight

quarters of positive absorption totaling 2.1 million square feet,” Voit reported.

RENTS


San Diego’s industrial rents posted weak gains in the second quarter. Reis reports second quarter warehouse/ distribution average asking and effective rents of $7.53 psf and $6.78 psf, up 0.1% and 0.3%, respectively, over the quarter. Rents are down year-over-year, by 1.2% and 0.6%, respectively. For Flex/R&D space, Reis reports average asking and effective rents of $11.50 psf and $10.07 psf, up 0.1% and 0.5%, respectively, over the quarter, and down 0.4% and up 0.5% over 12 months. Reis expects slow progress moving forward. Warehouse/distribution asking and effective rents are forecast to finish 2012 at $7.59 psf and $6.86 psf, up 1.5% and 1.9% for the year. Flex/R&D rents are forecast to finish the year at $11.63 psf asking and $10.20 psf effective, up 2.1% and 2.9%, respectively.

“The average asking rent for San Diego County industrial space ended the second quarter of 2012 at $0.86 per-square-foot per month ($10.32 psf), up two cents from the previous quarter, and just one cent under the rent reported at the same time last year,” according to Cushman & Wakefield. “While the overall market is only seeing minor fluctuations in rent on a quarterly basis, competition in those markets with single-digit vacancy rates have begun to put upward pressure on asking rents,” this source notes. Voit reports that the average triple-net asking lease rate in the second quarter was $8.04 psf, “a two-cent increase from 2012’s first quarter rate. The record high for asking lease rates, $.76 [$9.12 psf], was recorded in the third and fourth quarters of 2008.” According to Colliers, since a historical high point in third quarter 2008, “the countywide average asking rental rate for combined industrial and R&D space has been steadily decreasing.” Since first quarter 2011, rents have stabilized near $9.60 psf. The second quarter 2012 average rate of $9.96 psf “is still 16% less than the historical high,” this source notes. “Over the last nine quarters, the countywide monthly asking rent for all product types has remained stable between $0.79 [$9.48 psf] and $0.81 [$9.72 psf] per month per-square-foot triple net,” according to Cassidy Turley.