2020 Q2 Industrial San Diego Region

Behind the Numbers

• Countywide vacancy of 5.6% increased slightly in Q2 and the county registered 156,952 SF of negative net absorption.
• Nearly 4 million SF currently under construction, including more than 3.1 million SF of that has been preleased by Amazon in Otay Mesa and Poway.
• Countywide average asking NNN rental rate bumped up by $0.02/SF in Q2 to reach an all-time high of $1.29/SF/month - a 10.3% increase year-over-year. Rents in industrial space increased by 2.0% ($1.00/SF) whereas R&D space increased by 19.9% ($1.20/SF).

Net Absorption

The largest move-ins during Q2 were Cutwater Spirits’ occupancy of 48,000 SF at 8123 Miralani Dr in Miramar, Resonetics (+39,936 SF) at 10540 Heater Ct in Sorrento Mesa, Abena North America (+34,854 SF) at 2954 Norman Strasse Rd in San Marcos, and Coastal Trading Ventures +(31,800 SF) at 2500 Sweetwater Springs Rd in Spring Valley (East County). Two tenants, Assur Group (+18,188 SF) and Ninja Factory (+17,298 SF) moved into the new Keystone Innovation Industrial Park in Vista.

At the current rate of absorption and construction activity, this year could be the first time San Diego County has ended its year with negative absorption since 2009. If the year does end with overall negative demand, it will not likely be too severe. New construction that is expected to be completed by year-end will bring an at least 540,000 SF of positive absorption as those preleased tenants, chiefly Amazon in Poway, take occupancy. This positive absorption will be affected overall by potentially negative net absorption in the existing inventory.

Vacancy

Countywide combined industrial/R&D vacancy stood at 5.6% at the end of Q2 - an 11-basis point increase from the prior quarter. Direct vacancy made
up 5.3% of the inventory, while sublease vacancy stood at 0.4%. Vacancy in the industrial inventory increased by 18 basis points to 4.6% and the R&D
inventory decreased by 3 basis points to 8.3%.

10 out of the 21 submarkets posted vacancy less than 5% and only Sorrento Mesa (11.4%), Sorrento Valley (10.2%), and Carlsbad (10.8%) posted double-digit rates.

Whereas the office market is being affected by an uptick in available sublease space, industrial space does not appear to be subject to the same trend.  Available sublease space includes space that is actively being marketed regardless of whether it is currently vacant or not.  The amount of available sublease on the markets remained relatively unchanged since Q1 and had actually decreased by 2% compared to the average of the prior eight quarters.  The amount of physically vacant sublease space (691,367 SF) is less than the prior eight quarters as well. 

New Supply

Three buildings were completed in Q2 totaling 76,187 SF.  This included the 50,150 SF Carlsbad Innovate developed by Badiee Development in Carlsbad, Sawtooth Development Group’s 18,624 SF building at on Windy Point Drive in San Marcos, and a 7,413 SF building on Jackson Ridge Pkwy in Lakeside (East County).  

There are currently nine projects totaling 4.0 million SF under construction countywide. By year-end, nearly 30% (1.2 million SF) will be completed. The remaining 70% (2.8 million SF) will be completed next year, making 2021 the most active year for new industrial construction since 2007.

The two largest projects under construction were both preleased to Amazon.  This includes the two-building 533,950 SF Vantage Point project in Poway be developed by Ryan Companies and the 2.6 million SF building being developed by Seefried Properties in Otay Mesa.  Additional large-scale projects include the three-building 227,268 SF Majestic Sunroad Center, a joint venture between Sunroad Enterprises and Majestic Realty, also being built in Otay Mesa and the three-building 202,418 SF life-science campus in Torrey Pines called The Boardwalk.  

Trends and Outlook

While the COVID-19 pandemic has affected all commercial real estate sectors, the industrial market has experienced various outcomes based on the industry sectors within it. The post-pandemic period will likely see San Diego’s defense industry likely return to normal and the life science industry will continue to accelerate growth.  Local manufacturing could also see some growth as some businesses consider relocating some international operations back to San Diego. 

Smaller multi-tenant firms and incubator companies could find it hard to conduct business if these current economic conditions continue to persist. This is a period of uncertainty has placed a strain on many businesses and the mid- to long-term implications are hard to gauge across most industries or individual companies.

To better understand trends and emerging adjustments, please subscribe to Colliers’ COVID-19 Knowledge Leader page for resources and recent updates.