The global pandemic has created a very uncertain future for San Diego County's industrial market, although it didn't look so bad until the middle of March, according to a Colliers International first quarter report.
The countywide vacancy rate remained relatively flat in the first quarter at 5.3 percent as demand was met by 193,739 square feet of net absorption along with 372,782 square feet of new construction, Colliers reported.
San Diego County's direct vacancy rate made up 4.9 percent of the inventory, while sublease vacancy stood at 0.4 percent. The vacancy rate of pure industrial inventory increased by 5 basis points to 4.1 percent while R&D inventory increased by 14 basis points to 8.5 percent, according to the report.
Colliers said the increase in vacancy was due to new construction outpacing positive net absorption during the quarter. Twelve out of the 21 submarkets posted a vacancy rate of less than 5 percent in the first quarter, and only Sorrento Mesa (11.6 percent) and Carlsbad (10.9 percent) posted double-digit rates.
How the strength of the industrial market might change will likely depend on the length of the coronavirus outbreak. Depending on what's needed, some companies will actually benefit from the demands for given products and services.
Industrial construction activity continued to be robust with 1.39 million square feet currently under development despite the pandemic -- most of which is expected to be completed by year's end.
Approximately 1.78 million square feet of industrial space was under construction as of March 31 last year.
Torrey Pines, which is always in high demand for either life science, office or industrial space, posted the greatest net absorption of 175,108 square feet. Some of the submarket's absorption was a result of UC San Diego's occupancy of more than 70,000 square feet at the newly completed Center for Novel Therapeutics.
The Campus Point/Eastgate region was the second most active market with 69,179 square feet of positive net absorption, according to Colliers. JB Biodine occupied 29,548 square feet at 9381 Judicial Drive, while Poseida Therapeutics expanded into the remaining 15,146 square feet at 9390 Towne Centre Drive, thereby occupying the entire 72,921-square-foot building.
Other sizable tenant move-ins during the first quarter included United Technologies (60,184 square feet in Carlsbad), Dynamex/TF Final Mile (45,183 square feet in Chula Vista), and TEC Equipment (40,975 square feet in Otay Mesa).
Construction on three buildings, totaling 372,782 square feet, was completed in the first quarter. They included the 98,282-square-foot Alexandria GradLabs developed by Alexandria Real Estate Equities in Campus Point; Murphy Development's 137,000-square-foot building at The Campus at San Diego Business Park in Otay Mesa; and BioMed Realty Trust's 137,500-square-foot Center for Novel Therapeutics in Torrey Pines.
Colliers found that up until mid-March, new ground-up construction had been subject to high demand from companies that had tired of residing in aging space.
"In fact, even though 8.0 million square feet was completed over the last decade, net absorption outpaced new construction by 1.5 times," Colliers stated. "Nevertheless, the current novel coronavirus (COVID-19) pandemic will likely delay the start of new projects that are proposed throughout the county until there is a better understanding of what industrial demand will be until the pandemic subsides. Most of the 1.4 million square feet currently under construction is expected to be completed this year, but any new development after that is far from certain."
"As we publish this report, the U.S. and the world at large are facing a tremendous challenge, the scale of which is unprecedented in recent history. The spread of the novel coronavirus (COVID-19) is significantly altering day-to-day life, impacting society, the economy and, by extension, commercial real estate," Colliers continued. "The extent, length and severity of this pandemic is unknown and continues to evolve at a rapid pace. The scale of the impact and its timing varies between locations."
Once the pandemic subsides, Colliers said San Diego's defense industry will likely return to normal and the life science industry may accelerate growth. Local manufacturing could also see some growth as some businesses consider relocating some international operations in San Diego.
Not all will be rosy. Colliers emphasized that smaller multi-tenant firms and incubator companies could still face difficulties even as the markets improve.
"This is a period of uncertainty the likes of which have never been seen before and it will be at least several quarters until we have a hold on whether the industrial market we still be as strong -- or potentially stronger -- as it had been trending over the past eight years," Colliers stated.
The top leases in the first quarter included Ernest Packaging Solutions' 108,758-square-foot lease renewal at 1345 Sycamore Avenue in Vista; Sekisui Diagnostics' 52,959-square-foot new lease at 6740-6760 Cobra Way in Sorrento Mesa; and T-Force Logistics' 45,183-square-foot lease at 1690 Brandywine Avenue in Chula Vista.
The top industrial sale of the first quarter was Westcore Properties' $26.4 million acquisition of a 197,104-square-foot industrial building at 2620 Commerce Way in Vista. EverWest Real Estate Investors was the seller.
By Thor Kamban Biberman