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September 08, 2015

San Diego County's Industrial Market Continues its Hot Streak

Western Real Estate Business

Mickey Morera

San Diego's industrial market is on pace to be a record-setting year, as of the end of the second quarter. Countywide vacancy has plummeted to 5.76 percent due to another quarter of strong leasing and owner/user activity.

The majority of San Diego's industrial absorption has occurred on the fringes of the county. The southernmost submarket where this is occurring is Otay Mesa.

This market has been a historical laggard, but has recently witnessed a furry of leasing activity during the first half of 2015. The drivers for Otay Mesa's demand are high-quality, large blocks of space, proximity for companies with maquiladora operations in Mexico and companies migrating out of expensive central submarkets in search of value.

There is some speculative industrial development breaking ground in the county for the first time in almost 10 years. First Industrial Realty Trust and McDonald Property Group has tilted walls on First Park @ Ocean Ranch in Oceanside. The three building, 237,000-square-foot project has received strong preleasing activity from users that like the northern San Diego location as a launching point to serve San Diego, Orange County, Riverside County and Los Angeles. Most importantly new projects like First Park offers state-of-the art features tenants are looking for. These include ESFR sprinkler systems, 30-foot minimum clear height and energy-efficiency features that don't exist in most of the older inventory. Murphy Development will soon embark on another speculative project, a 122,000-square-foot building within its Siempre Viva Business Park in Otay Mesa.

Owner/user activity has never been stronger in San Diego, with many companies utilizing their strong balance sheets and very attractive financing to purchase buildings. Owner/user pricing has exceeded previous peak pricing. High demand, lack of available land, skyrocketing construction costs and limited available inventory have constrained any new supply while driven up pricing.

Industrial land pricing has exceeded $20 per square foot in virtually all markets except Otay Mesa. Some high-demand submarkets like Kearny Mesa, Miramar and parts of Carlsbad have seen land pricing reach more than $30 per square foot.

San Diego's high-tech and flex markets are also witnessing a strong rebound, with major life science and pharmaceutical companies expanding their campuses in La Jolla, University Towne Centre, Sorrento Valley, Sorrento Mesa, Oceanside and Poway.

Several major defense contractors are also back in the market, cautiously expanding after years of downsizing and belt tightening through the ugly days of sequestration. San Diego has always been a big defense and military town, and this should continue for the foreseeable future.

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