Market Report: San Diego Industrial - Fourth Quarter 2020
MARKET OVERVIEW
The industrial market is heading into 2021 on a roll. Leasing and sales volume in 4Q both reached the highest levels in more than a year. There was significant positive net absorption pushing the county’s vacancy rate lower following two consecutive years of vacancy-rate increase. E-commerce businesses are growing and have more than made up for other industrial use types that were initially impacted by the pandemic’s shutdown protocols. The extremely low interest rates have kept owner-user sales pricing in record territory. 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 4Q 2020 at 4.38%, a decrease of 44 basis points from the previous quarter’s vacancy rate of 4.82%. The I-15 Corridor now sits below 2% vacancy thanks in large part to the more than half a MSF that Amazon took possession of here in 3Q. The North County and South County areas have overall vacancy rates above 5%, while Central County and East County have an overall vacancy rate below 3%. The countywide vacancy rate has decreased 7.5% versus this time last year, and the countywide availability rate has increased 23.3% 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 1.9 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 $1.07 per square foot per month, which is an increase of one cent per square foot over the previous quarter. Compared with 4Q last year, we see a 3.9% 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. In the big picture view, industrial lease rates have been on an absolute tear over the past decade, increasing a hair under 50% during that time. Negotiating leverage in the industrial market remains in the hands of the landlords, and rental rates keep marching higher.
TRANSACTION ACTIVITY
The total space leased and sold in 4Q was approximately 4.7 MSF, an increase from the 3.8 MSF of transactions in 3Q, and an increase over even the pre-pandemic 4Q 2020 transaction level of 3.5 MSF. Leasing activity started slowly in 2020 but increased in each consecutive quarter. The uncertainty at the start of the pandemic quickly gave way to the reality that there would be no dive in market fundamentals for industrial real estate, and tenant requirements were not afforded the opportunity to remain in the wait-and- see mode. The 8.0 million total amount of square feet leased in 2020 was a decrease from the 9.3 MSF annual average between 2015–2019.
EMPLOYMENT
The unemployment rate in San Diego County was 6.6% in November 2020, down from a revised 7.5% in October 2020, and substantially greater than the year-ago estimate of 2.9%. This compares with an unadjusted unemployment rate of 7.9% for California and 6.5% for the nation during the same period. According to the State of California Employment Development Department, San Diego County gained 14,300 jobs between October 2020 and November 2020. With the normal delay in reporting from the California EDD, employment figures from December were unavailable at the time of publishing this report. In December, the employment data for the United States as a whole came in with 140,000 jobs lost, which was the first month of net job losses for the nation since April 2020.
Forecast: The San Diego industrial market has significant momentum heading into 2021. Demand from tenants and prospective buyers is still strong and there appears to be a broad-based business recovery despite another surge in virus cases and hospitalizations. Two vaccines are in the distribution phase with at least another two likely to be approved in the next few months. That should help reduce current pandemic protocols and give the services industries some welcome relief, which will give suppliers and distributors another boost. The construction pipeline is in full swing and the availability rate will increase in the near term, but the vacancy rate is expected to remain stable keeping market fundamentals on a firm footing.
CONSTRUCTION
1.4 MSF of new industrial projects were delivered in 2020, which is now the fourth year out of the past five with more than a 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 5.3 MSF of industrial buildings under construction at the end of the 2020. 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 598,892 SF of positive net absorption in 4Q, ending the year on a good note. The 1,390,421 SF of positive absorption in 2020 marks the largest growth of the San Diego market tenant base since 2015. The recent trend of the growing E-commerce sector was on full display with Amazon alone accounting for 900,000 SF of positive net absorption in 2020. The pandemic was not a detriment to the industrial market, as the first half of the year actually saw negative net absorption with the last two quarters of the year pushing the tally 2.5M back into the black. The San Diego industrial market has not seen a calendar year of negative net absorption since 2009.
