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August 25, 2017

Rising Industrial Lease Rates Concerning To SD Tenants

ALM GlobeSt

Carrie Rossenfeld

SAN DIEGO-With e-commerce creating greater infill demand for last-mile delivery, industrial lease rates are responding in kind, and Kidder Mathews' SVP and partner Bob Willingham, SIOR, doesn't see them dropping any time soon, he tells We spoke with Willingham about his greatest concerns regarding San Diego's industrial lease rates and the types of firms most interested in industrial space here. What are your greatest concerns about the industrial sector in San Diego?

Willingham: From a user perspective, the greatest concern is just how quickly lease rates have gone up over the last few years and how that's going to drive the market in general going forward. The cost of occupancy has gone up so much in San Diego, as it has in other places. This forces users to contemplate what type of footprint they want to have, and a lot of users are trying to figure out how to do more with less rather than making the big move.

Regarding the renewals that do happen, we're seeing users who are able to be more efficient with the space they have rather than expand into some of these newer buildings-very attractive new buildings, but the lease rates are hard to swallow. Users used to go to North County, Vista or South County, Otay Mesa for less-expensive space, compared to the 90-plus-cent range in mid-county. Space is more affordable when you go to the edge of the county. Oceanside was a 50-cent-net market a few years ago, and even lower in South County, but now they're doing deals in the high-60s to mid-70s. It's gone way, way up.

From a developer's and owner's perspective, concerns are the same as in other markets: how hard it is to get deals done with cost of TIs and Title 24, including upgrades on older properties. Finding land on which to develop is difficult, and the cost to develop in this market has gone up dramatically. What types of companies are most interested in this market?

Willingham: San Diego has a very well-diversified economy. Defense is still a major driver in San Diego-out on the I-15, General Atomics now occupies 3 million square feet, and Northrop Grumman and General Dynamics both have a significant presence in the county; the defense industry is still a very important side of our economy. But we also now have a more-diversified economy compared to the past, with strong medical-device and diagnostics from companies like Illumina and Thermo Fisher. Up in Carlsbad, ViaSat started out on the defense side of satellite communications, but is now very active on the commercial side. ViaSat has been able to grow its footprint to more than 700,000 square feet. The e-commerce side is starting to make a big impact: Amazon just signed a large deal on the I-15. Generally, those deals were under 100,000 square feet, and then Amazon signed a 180,000-square-foot lease in Rancho Bernardo-the biggest building the company has taken down in San Diego. There was also a FedEx Ground build-to-suit which was recently completed up in Oceanside. The demand is to get things to the customer within a day, so you have to have facilities closer to the population. What type of industrial space is most sought-after here?

Willingham: San Diego is more of a flex industrial market, where a lot of companies are looking for higher-finish, higher-parking-ratio type spaces, but the trend is toward lower-finish, more typical industrial space. Demand is for trucking, clear heights, modern ESFR fire sprinklers-that's really driving those warehouse-type uses we did not typically see a lot of in San Diego, but it seems to be the strongest part of the market. That type of product is also where we're seeing most of the new development in the market. What else should our readers know about the San Diego industrial market?

Willingham: There's a massive difference from one end of the county to the other, based on who the users are in those submarkets. The overall San Diego area is running out of developable industrial land, and the cost to develop has risen dramatically higher. I don't see rental rates and sale prices dropping any time soon without a significant change in the demand drivers.

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