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2020 Q1 Industrial San Diego Region Report

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Global pandemic creates uncertain conditions in the industrial market

Behind the Numbers

  • Countywide vacancy of 5.3% remained relatively flat in Q1 as demand was met by 193,739 SF of net absorption along with 372,782 SF of new construction.
  • Construction activity continues to be robust with 1.4 million SF currently under construction, most of which will be completed by year-end.
  • Countywide average asking NNN rental rate bumped up by $0.02/SF in Q1 to reach an all-time high of $1.27/SF/month - a 8.5% increase year-over-year.

Net Absorption

Industrial buildings (manufacturing, warehouse, distribution and multitenant/incubator uses) posted 54,953 SF of positive net absorption and R&D buildings (flex, wet lab and R&D uses) posted positive net absorption of 138,786 SF, for a combined industrial/R&D net absorption of 193,739 SF in Q1.

Torrey Pines posted the greatest net absorption (+175,108 SF). Some of the net absorption was due to UCSD’s occupancy of more than 70,000 SF at the newly completed Center for Novel Therapeutics.

Campus Point/Eastgate was the second most active market (+69,179 SF) for a second quarter in a row. JB Biodine occupied 29,548 SF at 9381 Judicial Dr while Poseida Therapeutics expanded into the remaining 15,146 SF at 9390 Towne Centre Dr, thereby occupying the entire 72,921 SF building.

Other sizable tenant move-ins included United Technologies (+60,184 SF) in Carlsbad, Dynamex/TF Final Mile (+45,183 SF) in Chula Vista (South Bay submarket), and TEC Equipment (+40,975 SF) in Otay Mesa.

Vacancy

Countywide combined industrial/R&D vacancy stood at 5.3% at the end of Q1 - an 8-basis point increase from the prior quarter. Direct vacancy made up 4.9% of the inventory, while sublease vacancy stood at 0.4%. Vacancy in the industrial inventory increased by 5 basis points to 4.1% and the R&D inventory increased by 14 basis points to 8.5%.

The increase in vacancy was due to new construction outpacing the positive net absorption during the quarter. Even though countywide net absorption was 193,739 SF, new construction totaled 372,782 SF, thereby causing the slight increase.

12 out of the 21 submarkets posted vacancy less than 5% and only Sorrento Mesa (11.6%) and Carlsbad (10.9%) posted double-digit rates.

New Supply

Three buildings were completed in Q1 totaling 372,782 SF. This included the 98,282 SF Alexandria GradLabs developed by Alexandria Real Estate Equities in Campus Point, Murphy Development’s 137,000 SF building at The Campus at San Diego Business Park in Otay Mesa, and BioMed Realty’s 137,500 SF Center for Novel Therapeutics in Torrey Pines.

New ground-up construction has been subject to high demand. In fact, even though 8.0 million SF was completed over the last decade, net absorption outpaced new construction by 1.5 times. 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 SF currently under construction will be completed this year but any new development after that is unknown.

Trends, Forecast & Outlook

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.

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. To better understand trends and emerging adjustments, please subscribe to Colliers’ COVID-19 Knowledge Leader page for resources and recent updates.

While the COVID-19 pandemic will certainly affect all commercial real estate sectors, the industrial market will likely experience various outcomes based on the industry sectors within it. Once the pandemic subsides and we begin to return to improved economic conditions, 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 back to San Diego.

But smaller multi-tenant firms and incubator companies could find it hard to conduct business if these current economic conditions continue to persist. 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.


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2020 Q1 Industrial San Diego Region Report

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