Market Report: San Diego Industrial - Third Quarter 2020
MARKET OVERVIEW
The third quarter was an improvement from the dismal second quarter, with some delayed second quarter activity coming to fruition this past quarter. Leasing activity increased, and there was significant positive absorption pushing the county’s vacancy rate back below 5%, following one quarter above that mark. There was one trend in the market that took over the third quarter — everywhere you looked the explosive growth of Amazon was evident in the San Diego industrial market. Amazon drove the largest properties under construction in Q3, the largest new buildings completed and occupied in 3Q, and the largest new leases signed in Q3. Amazon is active in all areas of the county in 2020; from Rose Canyon, to Otay Mesa, to Poway, to Vista, and areas in between. The socially distant nature of 2020 has accelerated many societal changes, and the growth of e-commerce is currently in warp speed.
VACANCY & AVAILABILITY
Direct / sublease space (unoccupied) finished 3Q 2020 at 4.93%, a decrease of 15 basis points from the previous quarter’s vacancy rate of 5.08%. The I-15 Corridor now sits below 2% vacancy thanks in large part to the more than 0.5 MSF that Amazon took possession of here in 3Q. The North County and South County areas have overall vacancy rates above 6%, while Central County and East County have an overall vacancy rate below 4%. The countywide vacancy rate has increased 10.4% versus this time last year, and the countywide availability rate has increased 21.3% 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 1.4 MSF under construction outside of the Amazon build-to-suit in Otay Mesa. These other developments under construction have seen almost no preleasing to speak of thus far which is the primary cause of the widening gap between vacancy and availability rates.
LEASE RATES
The average asking lease rate checked in at $1.06 PSF per month, which is an increase of $0.01 PSF over the previous quarter. Compared with 3Q last year, we see a 1.9% annual increase. The last five calendar years have had an average annual asking rental rate increase of 6.5%, so the increase over the last twelve months has been somewhat tame in comparison. On the other hand, considering that we have experienced a recession unlike any other in modern times, a 2% annual increase points towards strength in the industrial market.
TRANSACTION ACTIVITY
The total space leased and sold in 3Q was approximately
2.8 MSF, an increase from the 2.5 MSF of transactions in 2Q, but a sharp decrease from the 5.2 MSF of transactions in 3Q 2019. The number of lease transactions in 3Q was the highest quarterly total since 3Q 2019. This is at least partially the byproduct of pent up demand from 2Q which had an incredibly depressed level of transaction volume stemming from the uncertainty in the early months of the COVID-19 lockdowns. The usual suspect, Amazon, was the tenant in the largest lease of the quarter. Amazon took the entire 142,000 SF building at 16915 Via Del Campo, which was the first new speculative industrial building constructed in Rancho Bernardo in a decade. Sales volume in the 3Q likewise rebounded with more than 1 MSF of industrial buildings sold, more than doubling the tally from 2Q. The largest industrial building sold in the quarter was 395 Bay Boulevard in Chula Vista. Earlier in 2020 this building was vacated by Collins/UTC Aerospace due to a long-planned consolidation. This vacated building accounts for the largest source of negative net absorption in San Diego County for 2020.
EMPLOYMENT
The unemployment rate in San Diego County was 9.9% in August 2020, down from a revised 12.4% in July 2020, and substantially greater than the year-ago estimate of 3.4%. This compares with an unadjusted unemployment rate of 11.6% for California and 8.5% for the nation during the same period. According to the State of California Employment Development Department, San Diego County gained 20,500 jobs between July 2020 and August 2020. With the normal delay in reporting from the California EDD, employment figures from September were unavailable at the time of publishing this report. In September, the employment data for the United States as a whole came in with 661,000 jobs added which was the fifth straight month of net job gains.
Forecast: The road forward heavily depends on factors outside of traditional free market considerations, including COVID-19 vaccine development, state and local government restrictions on business operations, and economic stimulus actions. Based upon the current conditions and outlook, we anticipate a decrease in net effective rental rates as concessions will increase in the current diminished transaction-volume environment. At present, these movements are anticipated to be moderate on average, and will fluctuate significantly based upon the specific submarket within the county. The fourth quarter looks to be another period of below typical sales and leasing volume, but occupancy levels will remain high leading nominal rental rates to remain relatively stable for the county overall.
CONSTRUCTION
More than 1 MSF of new industrial projects were delivered through the first three quarters of 2020, which is now 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. Astoundingly, there were more than 4 MSF of industrial buildings under construction at the end of the 3Q. The San Diego industrial market has not seen more than 3 MSF of industrial buildings under construction since 1999. Nearly all of the product currently under construction is in Otay Mesa, including a 4-story multi-million square foot building under construction for Amazon which will be, by far, the largest industrial building in San Diego County.
ABSORPTION
There was 808,511 SF of positive net absorption in 3Q, moving the San Diego industrial market back into the black for the year. Interestingly, the growth in the tenant base has been geographically limited. Through the first three quarters of the year, the Central, East, and South County areas have all seen negative net absorption, while the North County and I-15 Corridor have posted positive net absorption. The I-15 Corridor alone has posted more than 1 MSF of positive net absorption this year. The lion’s share of that has come from two Amazon leases: 534,000 SF in Poway, and 142,000 SF in Rancho Bernardo. The San Diego industrial market has not seen a calendar year of negative net absorption since 2009.
