Market Report: San Diego Industrial - Second Quarter 2020
MARKET OVERVIEW
Simply put, sales and leasing activity in the first half of 2020 was a shadow of the levels typical in recent years. The market remains stable, however, as the vacancy rate only moved nominally higher, and the available space on the market for lease was actually a net decrease in the second quarter. It is becoming cliché, but Amazon continues to remain extremely active in expansion, and the increased demand from stay-at-home consumers is rapidly translating to additional real estate activity from the e-commerce behemoth.
VACANCY
Direct / sublease space (unoccupied) finished the second quarter 2020 at 5.04%, an increase of 34 basis points from the previous quarter’s vacancy rate of 4.70%. The two outermost sections of the county, the North County and South County, had the highest vacancy rates at 7.3% and 5.8%, respectively.
LEASE RATES
The average asking lease rate checked in at $1.06 per square foot per month, which is an increase of two cents per square foot over the previous quarter. Average asking lease rates have increased a total of 47% over the past 10 years.
TRANSACTION ACTIVITY
The total space leased and sold in the second quarter was approximately 2.2 MSF, a decrease from the 2.5 MSF of transactions in the first quarter 2020. If the current pace of sales and leasing activity continued, it would lead to an annual total less than half of 2019’s transaction volume.
EMPLOYMENT
The unemployment rate in San Diego County was 15.0% in May 2020, unchanged from a revised 15.0% in April 2020, and substantially greater than the year- ago estimate of 2.8%. This compares with an unadjusted unemployment rate of 15.9% for California and 13.0% for the nation during the same period. According to the State of California Employment Development Department, San Diego County lost 195,800 payroll jobs between May 2019 and May 2020 and gained 18,200 jobs between April 2020 and May 2020. In June, the employment data for the United States as a whole came in with 4.8 million jobs added which was a record for the most jobs added in a month. With the normal delay in reporting from the California EDD, employment figures from June were unavailable at the time of publishing this report.
CONSTRUCTION
213,000 square feet of new industrial projects were delivered in the first half of 2020. Based upon the delivery timeline for the current under-construction pipeline, 2020 will be the fourth year out of the past five with more than 1 MSF of new construction completed. This is in contrast to the 360,000 per year of new construction which was the annual average from 2008 through 2015. In the second quarter, Ryan Companies leased its entire 534,000-square-foot project under construction in Poway to Amazon. None of the other 633,000 square feet of industrial buildings under construction has been preleased.
ABSORPTION
There was 412,373 square feet of negative net absorption in the second quarter pushing the total net absorption for the first half of the year to negative 190,119 square feet. The Amazon lease in Poway, however, will more than make up for the negative absorption from the first half of the year. Through the end of the second quarter, Chula Vista had the largest negative net absorption in the county at approximately 300,000 square feet. This stems from the Collins / UTC Aerospace manufacturing facility 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 second quarter, a decrease from the previous quarter’s availability rate of 7.5%, but an increase of 5.6% year over year. 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.
