Market Report: San Diego Industrial - First Quarter 2021
MARKET OVERVIEW
The industrial market is heading into 2021 sluggishly in comparison with recent activity levels. Both leasing and sales volume in 1Q started the year well below normal levels. This balances out 2020’s strong end-of-the-year push. The slow start aside, fundamentals keep improving with 0.25 MSF of positive net absorption in 1Q, and a year-over-year increase to the county’s occupancy rate. The industrial development pipeline is at a level not seen in more than a decade, but the demand in the market has kept pace with the surge of new industrial buildings over the past three years.
VACANCY & AVAILABILITY
Direct / sublease space (unoccupied) finished 1Q 2021 at 4.45%, a slight increase over the previous quarter’s vacancy rate of 4.37%, but lower than the year ago rate of 4.67%. The I-15 Corridor now sits below 1% vacancy thanks in large part to the more than 0.5 MSF that Amazon took possession of here in 3Q 2020. The North County area has the highest vacancy rate of any segment of the county, currently at 6.3%, while South County has a 12.7% availability rate which is the highest in San Diego County. The countywide vacancy rate has decreased 4.7% versus this time last year, while the countywide availability rate has increased 0.7% year-over-year. The availability rate includes space which is being marketed for lease which is not currently ready for new occupiers. There are currently 1.9 MSF under construction outside of the Amazon build-to-suit in Otay Mesa. These other developments under construction have less than 10% of their space preleased, which is the primary cause of the widening gap between vacancy and availability rates.
LEASE RATES
The average asking lease rate checked in at $1.07 per square foot per month, which is a decrease of two cents per square foot over the previous quarter. Compared with 1Q last year, we see a 1% annual increase. Over the past two years the average asking Square Feet rental rate has increased at an average of 3.4% per year. The preceding five years saw an average annual increase of 6.2%. So, rental rates remain at all-time highs, but the rate of increase appears to be slowing. In the big- picture view, industrial lease rates have been on an absolute tear since the end of 2012, increasing nearly 50% during that time. By and large, negotiating leverage in the industrial market remains in the hands of the landlords, and rental rates remain elevated.
TRANSACTION ACTIVITY
The total space leased and sold in 1Q was approximately 3.2 MSF, a decrease from the 4.7 MSF of transactions in 4Q, but an increase over the 1Q 2020 transaction level of 2.6 MSF. The largest lease of the quarter was Quidel’s taking 128,7745 SF in Carlsbad in a building which Alexandria acquired in the quarter. This is a testament to the impact from recent increases in biotech and life sciences demand. There were 249 lease transactions recorded in 1Q which was well below the quarterly average of 297 leases consummated in the prior two years. Similarly, the 46 industrial buildings sold in 1Q was a decrease from the quarterly average of 54 buildings sold per quarter between 2019-2020.
EMPLOYMENT
The unemployment rate in San Diego County was 7.2% in February 2021, down from a revised 8.0% in January 2021, and substantially greater than the year- ago estimate of 3.2%. This compares with an unadjusted unemployment rate of 8.4% for California and 6.6% for the nation during the same period. According to the State of California Employment Development Department, San Diego County gained 31,900 jobs between January 2021 and February 2021. Over the 12-month period between February 2020 and February 2021, San Diego County employment fell by 131,700 jobs, or 8.7%. With the normal delay in reporting from the California EDD, employment figures from March were unavailable at the time of publishing this report. The jobs report for the U.S. overall showed a gain of 916,000 jobs in March, the largest monthly increase of jobs since August.
Forecast: Within less than a month of this report being published all California adults will be eligible to get a COVID-19 vaccine, and the Governor has announced his intention to have the California economy “fully reopen” before the end of 2Q. U.S. Treasury Secretary Janet Yellen recently predicted a return to full employment in 2022. Based upon these and other predictions from prominent analysts, the economy is projected to have a period of strong growth for at least the upcoming 12-18 months. There are some factors that could put a damper on the local industrial market growth. While mortgage interest rates remain near all-time lows, they have begun an upward trajectory in recent months. Additionally, the current construction pipeline will add upward pressure to the countywide vacancy rate in the near term. However, we do not expect a significant increase in vacancy, and rental rates along with owner-user sale prices should remain high.
CONSTRUCTION
1 MSF of new industrial projects were delivered in 2020, which is now the fourth year out of the past five with more than 1 MSF of new construction completed. This is in stark contrast to the 360,000 per year of new construction which was the annual average from 2008 through 2015. Astoundingly, there were more than 5.2 MSF of industrial buildings under construction at the end of 1Q 2021. The San Diego industrial market has not seen more than 3 MSF of industrial buildings under construction since 1999. 97% of the industrial property under construction is in Otay Mesa, with the 4-story building under construction for Amazon accounting for 3.3 MSF of the total.
ABSORPTION
There was 241,315 SF of positive net absorption in 1Q, continuing the streak of strong demand for industrial real estate. This was the third consecutive quarter of more space being occupied than vacated. The San Diego industrial market has not seen a calendar year of negative net absorption since 2009.
