Demand for industrial space sets record, say experts from CBRE, Cushman & Wakefield, JLL

Demand for industrial space in San Diego County set a record in the second quarter of 2022, with the county-wide vacancy rate dropping to the unheard-of level of less than 2% and rents rapidly rising.

“The market is extremely, extremely tight,” said Hunter Rowe, vice president of capital markets for CBRE in San Diego. CBRE reported that the vacancy rate countywide dropped to 1.9% in the second quarter, but in Central County, it was down to 1.5%, Rowe said.

“It’s really challenging in our market today for users to find space, quality space,” Rowe said.

Rents Rising

The outlook for the rest of the year and even into 2023 is more of the same, according to brokers with commercial real estate agencies.

“I can’t predict what’s going to happen with the economy but I can tell you that San Diego will definitely end up on top because of our diverse economy,” said Bryce Aberg, executive managing director of Cushman & Wakefield in San Diego.

“Our team is extremely excited about the future and the opportunity that the fourth quarter and the beginning of 2023 is going to bring,” Aberg said. “We’re continuing to see double-digit rental increases throughout the market.”

Cushman & Wakefield reported that the average asking rent for all types of industrial buildings was 11.6% higher in the second quarter from the previous quarter and 15.5% higher than a year ago.

Too Little Coming

The only downside is that rising interest rates have led some investors to pause when it comes to buying industrial property, according to Greg Lewis, executive vice president of JLL in San Diego.

“We’re seeing a slight dip in pricing, a slight pricing correction as a result of the interest rate environment,” Lewis said, but he emphasized that the pause is likely only temporary. “The long term outlook is very positive,” Lewis said. Taken in context, even if sale prices dipped 5% or 10%, “it’s still well above the previous pricing cycle,” Lewis said.

New construction is failing to keep pace with the demand. Lewis said the JLL is tracking “way more demand” for industrial space than there are new projects to fill.

Cushman & Wakefield reported that 2.2 million square feet of industrial space was under construction at the end of the second quarter, but the firm reported that 59.2% of that has been leased before it’s even finished. With the exception of a Kearny Mesa warehouse and one East County project, most of the new construction has been in Otay Mesa.

Rowe said that he expected that investors will start buying existing industrial and office buildings in Central County that are occupied, holding them until leases expire, then razing them to make way for new industrial buildings. “The demand for that is strong right now,” Rowe said. “I think you’re going to see more construction in the older parts of our county.” ■