San Diego’s industrial real estate market showed a relatively subdued quarter with static rents and rising vacancy rates. However, market demand remains extremely strong, and including several new properties and construction projects indicates optimistic growth projections.
The increase in vacancies across flex and industrial spaces can be attributed to adding new buildings in select submarkets.
San Diego’s unemployment rate remains below the national average, and the job market continues to rapidly advance as it pulls itself out of the pandemic slump.
General Area Overview & Demographics
The second largest city in California, San Diego, has a population of 1.4 million as of 2023.
The median age in San Diego is 35, and the median household income is $83,454. San Diego has a strong economy bolstered by its position near one of the busiest international land borders in the world.
San Diego has a semi-arid climate with dry, warm summers and short, mild winters. Average temperatures during the summer sit around 70 degrees F, providing an extremely temperate climate year-round. Snow and rain are relatively rare.
San Diego has a large economy with significant defense contracting, international trade, manufacturing, and tourism activity. The city has the largest naval fleet in the world and is home to several major tech companies, such as Nokia, LG, Qualcomm, and Cricket Communications.
Summary of San Diego Industrial Real Estate Performance in Q3 2022
The San Diego industrial real estate market posted 66,000 square feet of negative absorption in Q3 2022, mostly confined to several submarkets. Despite the negative absorption, demand in the real estate market remains stable.
Overall vacancy rates rose by 13 basis points from an average of 2.53% in Q2 2022 to 2.66% in Q3 2022, with a 1.86% and 5.09% vacancy rate for industrial and flex properties, respectively.
The submarkets with the lowest vacancy rates were East County and South County at 1.23% and 1.55%, while the submarket with the highest vacancy rate was North City at 3.17%. The submarket with the highest vacancy rate change was South County, which dropped from 1.91% to 1.55%.
What Are Industrial Rents Like in San Diego, CA?
Combined Industrial rents in San Diego stayed stable in Q3 2022 at $1.47 per square foot. Industrial rents rose 7 cents to an average of $1.28, while flex rents average fell 11 cents to $1.99 per square foot.
By the end of Q3 2022, overall industrial rents in San Diego showed a 9% YOY increase.
The submarkets with the highest average asking rates in San Diego included North City, the I-15 Corridor, and Central San Diego, at $2.43, $1.66, and $1.52, respectively.
Industrial rents have risen by nearly 30% in the past three years, while flex rents have decreased by 0.5% in the same time period, resulting in a combined 10.5% rental increase over three years.
Purchase & Leasing Activity
Purchasing and leasing activity was relatively subdued despite three previous quarters of positive demand and activity.
Demand and sales activity were most active in the life science/wet labs space as many developers repurpose office space that is no longer in use. Purchasing and leasing activity will remain stable as we enter the new year.
Notable Industrial Real Estate Deals in San Diego in Q3 2022
The San Diego industrial market posted several notable transactions this quarter, such as:
- Rae System’s 68,000-square-foot lease at 2055 Sanyo Ave;
- TransPower’s 42,000-square-foot lease at 2057 Aldergrove Ave;
- Leidos’s 41,000 lease at 2811 La Mirada Dr.;
- An undisclosed sale for $515 per square foot at 5670 Kearny Mesa Rd; and,
- An undisclosed sale for $737 per square foot at 7330 and 7360 Carroll Rd.
Most of these transactions were in suburban markets away from downtown and the central business district.
New Industrial Real Estate Development Activity in San Diego in Q3 2022
San Diego added over 190,000 square feet of new construction in Q3 2022, bringing total YTD additions to over 1.8 million square feet.
About 60% of this new construction is dedicated to life science activities. The San Diego industrial real estate market currently has over 5.4 million square feet under construction.
San Diego added less new inventory this quarter than in Q2 2022, the construction pipeline remains highly active, with many notable projects expected to be delivered in 2023 and 2024.
Market Forecast for San Diego’s Industrial Real Estate Market in 2023
Despite static rental rates and rising vacancies, San Diego’s real estate market is expected to make significant gains in 2023.
Adding over 5 million square feet of industrial space will considerably drive consumer demand and stimulate increased leasing activity.
Additionally, San Diego’s tremendous job growth and low unemployment rates make it very unlikely that the market will hit a recession in the near future.
Takeaways for Industrial Real Estate Investors
Industrial investors in San Diego have little to worry about going into 2023. Rental rates will increase as the city adds more inventory and demand grows, while the active construction pipeline will stimulate buying activity in capital markets.
Vacancy rates might rise slightly during the year's beginning due to new construction additions but should level off during the first half of 2023. Aside from potential construction delays due to high-interest rates, investors can stay optimistic.
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