Market Report: San Diego Industrial - Fourth Quarter 2019
MARKET OVERVIEW
The San Diego County industrial market is finally seeing some demand pressure relief with the influx of new construction coming to the market. Vacancy rates are slowly backing off their historic lows, despite the half million square feet of positive net absorption for 2019 indicating a growing tenant base. Rental rates continue to reach all-time highs quarter after quarter. The impact of the new construction has been most pronounced in North County which has been the epicenter of new product coming into the market, but even the Central County and East County areas have finally seen a small increase in vacancy.
VACANCY
Direct / sublease space (unoccupied) finished the fourth quarter of 2019 at 4.77%, an increase of 15 basis points from the previous quarter’s vacancy rate of 4.62%, and 3% higher than the fourth quarter of 2018’s rate of 4.63%. 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, a one-cent decrease from the previous quarter, but a 4% increase year-over-year. The rate of increases has started to slow, but 4% for 2019 is nothing to shrug at. The new construction that continues to come online will push the market towards continued rental rate increases as the new product demands higher rent.
TRANSACTION ACTIVITY
The total square feet leased and sold in the fourth quarter was approximately 2.5 MSF, a decrease from the 4.7 MSF of transactions in the third 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 2.9% in November 2019, unchanged from a revised 2.9% in October 2019, and below the year-ago estimate of 3.1%. This compares with an unadjusted unemployment rate of 3.7% for California and 3.3% for the nation during the same period. According to the State of California Employment Development Department, San Diego County gained 34,300 payroll jobs between November 2018 and November 2019, including 8,200 from the professional and business sector, which reported the largest overall gain. The government sector reported a growth of 7,800 jobs, the second most among the major employment sectors. The largest year-over-year loss was in trade, transportation, and utilities which reported 1,000 fewer jobs than the prior year.
CONSTRUCTION
2.7 MSF of new industrial projects were delivered in 2018, the most delivered since 2006. At the end of 2019, the new construction pipeline still has legs, with 1 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 the 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 multi-story projects Amazon has in the works across the U.S.
ABSORPTION
There were 187,560 square feet of negative net absorption in the fourth quarter, but 2019 was in the black overall with a total of 508,370 square feet for the year. The San Diego industrial market has now recorded ten consecutive years of positive net absorption.
AVAILABILITY
Direct/sublease space being marketed was 6.88% at the end of the fourth quarter, a decrease from the previous quarter’s availability rate of 7.24%, and no change versus the end of 2018. 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.
