Market Report: San Diego Industrial - First Quarter 2020
MARKET OVERVIEW
Most of the first quarter was in the books by the time shelter-in- place orders took effect in March. The first quarter will primarily act as a benchmark from which to compare the pandemic effects on the market over the subsequent quarter. The industrial market came into the crisis with the most momentum among commercial property types. Demand from tenants and buyers has been extremely strong, as evidenced by the dramatic increase in rental rates and sales pricing in this economic cycle. The construction pipeline finally got up and running over the past couple years which provided some relief on vacancy rates which were extremely tight. The first quarter was subdued in terms of recent expectations. There were no rental rate increases, and negative net absorption caused the vacancy rate to tick up.
VACANCY
Direct / sublease space (unoccupied) finished the first quarter of 2020 at 4.99%, an increase of 21 basis points from the previous quarter’s vacancy rate of 4.78%. Unsurprisingly, the areas with the least amount of recent construction, Central County and East County, both have overall vacancy rates near 3%, well below the countywide average.
LEASE RATES
The average asking lease rate checked in at $1.04 per square foot per month, which is unchanged from the prior quarter, and unchanged from the rate of a year ago. Average asking lease rates have increased a total of 42% over the past 10 years.
TRANSACTION ACTIVITY
The total leased and sold in the first quarter of 2020 was approximately 2.2 MSF, a decrease from the 3.3 MSF of transactions in the fourth quarter of 2019. This statistic can have some lag time in being reported, so look for this quarter’s figures to end up somewhat higher in the next report.
EMPLOYMENT
The unemployment rate in San Diego County was 3.2% in February 2020, down from a revised 3.3% in January 2020, and below the year-ago estimate of 3.4%. This compares with an unadjusted unemployment rate of 4.3% for California and 3.8% for the nation during the same period. According to the State of California Employment Development Department, San Diego County gained 26,400 payroll jobs between February 2019 and February 2020. In mid-March the unemployment claims for the United States as a whole came in at 3.28 million claims for a single week which was a record claim for a single week, nearly five times greater than the previous record which was set in 1982. Subsequent weeks had even more unemployment claims. With the normal delay in reporting from the California EDD, employment figures from March were unavailable at the time of publishing this report. Suffice it to say stay-at-home orders related to the COVID-19 pandemic will lead to an increase in local unemployment over the next months.
CONSTRUCTION
2.7 MSF of new industrial projects were delivered in 2018, the most square feet delivered since 2006, followed by 1.2 MSF delivered in 2019. The construction pipeline still has legs, with 1.2 MSF under construction. With the vast majority of the North County construction already completed, Poway has moved to the forefront as the submarket with the most product currently under construction. Ryan Companies is developing a 531,000 square foot speculative project in Poway called Vantage Point. Next up looks to be South County with a string of projects lined up, not least of which is the 2.6 MSF distribution facility that Amazon is planning in Otay Mesa. It will be the first of its kind in San Diego County, and among a handful of multistory projects Amazon has in the works across the U.S.
ABSORPTION
There was negative net absorption of 185,609 square feet in the first quarter. The North County actually recorded nearly half a million square feet of positive net absorption in the first quarter, but Chula Vista had the largest negative net absorption in the county of approximately 300,000 square feet. This stems from the Collins / UTC Aerospace manufacturing downsizing. The San Diego industrial market has not seen a calendar year of negative net absorption since 2009.
AVAILABILITY
Direct /sublease space being marketed was 7.3% at the end of the first quarter, an increase from the previous quarter’s availability rate of 6.73%, and an increase of 21 basis points since the first quarter of 2019. The availability rate remains more than two percentage points higher than the vacancy rate. Most of this available space which is not vacant is in the current construction pipeline.
