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San Diego County | Industrial
Behind the Numbers
- Countywide vacancy dropped to 5.0% increased driven by 1.5 million SF of positive net absorption in Q4.
- Nearly 5.8 million SF is currently under construction, including 3.3 million SF preleased by Amazon in Otay Mesa.
- Countywide average asking NNN rental rate increased by $0.07/SF in Q4 to reach an all-time high of $1.37/SF/month - a 9.6% increase year-over-year. The increase was also the single-highest quarterly nominal increase on record. Rents in industrial space increased by 5.1% ($1.03/SF), whereas R&D space increased by 16.5% ($2.19/SF).
Net Absorption
Industrial buildings (manufacturing, warehouse, distribution and multitenant/incubator uses) posted 734,956 SF of net absorption and R&D buildings (flex, wet lab and R&D uses) posted 764,920 SF, for a combined industrial/R&D net absorption of 1.50 million SF in Q4 and overall annual net absorption to 1.64 million SF in 2020. Combined industrial/R&D net absorption in Q4 2020 was the highest amount ever recorded for a single quarter, narrowly outpacing the 1.47 million SF (Q2 2005) recorded 14½ years ago.
Five submarkets recorded more than 100,000 SF during the quarter with Sorrento Mesa (+450,982 SF) and Carlsbad (+342,196 SF) taking the top spots. A few of the largest move-ins during Q4 were Alphatec (+121,541 SF) at 1950 Camino Vida Roble in Carlsbad, GenMark Diagnostics (+73,057 SF) at 6221 El Camino Real in Carlsbad, and Quidel Corporation (+106,412 SF) at 10015 Waples Ct in Sorrento Mesa which was listed by Colliers International.
Carlsbad (+533,977 SF) and Poway (+529,417) recorded the most net absorption for the year. Additionally, at 1.3%, Poway has the lowest vacancy of any major submarket in the county. In fact, Sorrento Valley (14.1%) is the only submarket countywide to have a vacancy rate in double digits. However, with the current trend toward conversion of flex/R&D space into much sought after lab and life science space, it is expected that even Sorrento Valley will begin to see its net absorption trend positive and vacancy slide downward over the next year.
Vacancy
Countywide combined industrial/R&D vacancy stood at 5.0% at the end of Q4 - a 76-basis point (BPS) decrease from the prior quarter. Direct vacancy made up 4.6% (-63 BPS) of the inventory, while sublease vacancy stood at 0.4% (-13 BPS). Vacancy in the industrial inventory decreased by 52 BPS to 4.0% and the R&D inventory decreased by 140 BPS to 7.5%.
13 out of San Diego County’s 21 submarkets posted vacancy less than 5% and only Sorrento Valley (14.1%) posted a double-digit rate. Sublease vacancy increased slightly in Q3 but dropped back below 0.5% at year-end. Even as the local economy has slowed significantly due to a pandemic that has affected all other property sectors, the industrial market has not only remained resilient, but has continued to thrive. There is a strong potential for vacancy to reach its lowest level on record by the end of 2021.
Supply
A single 9,000 SF build-to-suit for Enstrom Mold and Engineering was completed on Trade St in San Marcos in the last quarter of the year. This added to a total of 1.29 million SF completed in 2020.
There are currently eleven projects totaling 5.77 million SF under construction countywide. Otay Mesa makes up 93% (5.34 million SF) of all the space currently under construction countywide. The largest project under construction is the 3.3 million SF building being developed by Seefried Properties for Amazon in Otay Mesa. The e-commerce giant will be occupying nearly 4 million SF countywide in 2020 and 2021 in new construction. Amazon’s total presence countywide will reach nearly 5 million SF, making it the region’s largest corporate tenant. Additional, projects being built in Otay Mesa include Landmark at Otay (845,830 SF), Majestic Sunroad Center (227,268 SF), Otay Crossings (151,423 SF), and Airway Industrial Park (135,623 SF) – all with leasing being represented by Colliers International – along with, Brown Field Technology Park (229,063 SF), and California Crossings (453,330 SF).
Otay Mesa’s neighboring South County submarket of Chula Vista has 95,500 SF under construction at Otay River Business Park, while 69,388 SF is nearing completion at River Run Business Park in Lakeside. Life science space continues to see soaring construction in Torrey Pines as Alexandria Real Estate Equities nears completion on Spectrum III (146,456 SF) and Healthpeak Properties is underway on The Boardwalk (191,709 SF).
Trends and Outlook
Relative to other property types such as office and retail, the industrial and R&D market sector has not been as adversely affected by the COVID pandemic fueled recession. Growing industries such defense, life science and e-commerce have benefited from demand in San Diego County, which has a strong base in these sectors.
The relative strength of San Diego industrial and R&D base is one of the primary reasons asking rental rates continue experience increasing growth and are expected to continue to do so for the foreseeable future. A shrinking supply of industrially zoned raw land is placing a constraint on future ground-up development, which puts additional upward pressure on rents.
Because of the growing demand for life science space, many of the North City submarkets such as Sorrento Mesa, Sorrento Valley, Torrey Pines and Campus Point are seeing a trend toward converting low-rise office and flex/R&D space into life science space to support the sector’s accelerating growth.
In Q4, Longfellow Real Estate Partners purchased the “The Foundry” – a 281,000 SF two-building Class A office mid-rise project in Sorrento Mesa – with plans to convert the project to life science space. Additionally, Longfellow is converting 23-buildings with 660,000 SF of R&D space into high-end lab space in the neighboring Sorrento Valley market. Over the next year, we can expect more redevelopment of office space and new ground up life science construction.
Demand will continue to be strong well into 2021 and rents will continue to increase at the steady rate they have been experiencing over the last decade. Most of the absorption will be concentrated on new construction coming online throughout the year. In fact, 5.6 million SF will be completed by year-end and account for 3.3 million SF of net absorption just based off the nearly 60% of pre-leasing already completed. In addition, continued demand in existing buildings, vacancy will likely drop to nearly 4% by the end of 2021.
