C&W Reports Industrial Vacancy Rates Remain in the Low Single Digits
1 Aug, 2008, San Diego, CA
The diversified nature of the San Diego economy coupled with well-timed lower levels of construction activity have helped insulate the industrial market from the worst of the current downturn, according to Tucker Hohenstein, senior director with Cushman & Wakefield.
Cushman & Wakefield’s recently released report shows a direct countywide vacancy of 7 percent for the quarter, an indication of continuity in supply and demand balance. Hohenstein notes that while demand for space has slowed due to contraction by housing and construction-related businesses, other sectors such as defense and technology industries are reporting gains.
“South County, specifically Otay Mesa, along with Carlsbad and Oceanside to the north, have been most affected by the current slowdown in the economy,” said Hohenstein. “These areas led the county in residential and industrial construction during the recent boom due to their large supplies of more affordably priced land. Now South County, and to a lesser degree Carlsbad and Oceanside, lead the county in home foreclosures as well as increased direct industrial vacancy.”
The Cushman & Wakefield report shows that despite year-to-date direct negative absorption of 286,000 square feet, gross leasing activity totals 4.2-million-square-feet. This, along with just 940,839 square feet of space under construction countywide, should prevent vacancy from spiking significantly. The largest lease of the second quarter was the Paradigm Group which signed a five-year, $4.5 million lease for 124,000 square feet in the Siempre Viva Business Park in Otay Mesa.
“Corporate belt-tightening continues to return some space to the market,” said Charles Adolphe, director with Cushman & Wakefield. “The most notable example is Kyocera, which recently downsized its space in Eastgate Mall/Campus Point from 400,000 square feet to 175,000 square feet.”
A counterweight to downsizing and lower demand for space has been the emergence of short-term lease commitments as an alternative strategy for landlords to generate cash flow and offset operating expenses.
An example is the Summit at Rancho Bernardo which Jay Paul acquired with plans to redevelop the project and an adjacent site into a 3.2-million-square-foot campus. With these plans temporarily on hold, a variety of tenants are leasing existing space, which will eventually be demolished, on a month-to-month basis. Sony also occupies 200,000 square feet in the project with plans to relocate when its new headquarters are completed next year.
In downtown San Diego, buildings owned and previously occupied by Jerome’s Furniture are also being leased on a month-to-month basis. These buildings will eventually be sold for residential redevelopment since downtown land prices are now too high to support industrial use. Adolphe notes that the trend toward short-term leases is also apparent in Otay Mesa where a 39,000 square-foot building recently leased for one year at a below-market rate.
Cushman & Wakefield reports that direct asking rental rates are down just slightly for industrial multi-tenant space to $1.08 per square foot/per month with concessions now standard in submarkets with larger quantities of available space.
“The San Diego County industrial market as a whole is not overbuilt. However, the current slowdown creates a window of opportunity for tenants to secure quality space at very competitive prices,” said Adolphe.
In 2009, Cushman & Wakefield anticipates fewer construction starts will occur as developers wait for demand to improve. Vacancy rates will rise slightly as inventory takes longer to absorb but will stay below 9.0 percent overall in the county.
“We expect that front-end concessions including free rent will continue to be offered to attract long-term space commitments, and short-term agreements will gain popularity as landlords look to generate and maintain interim cash flow,” Hohenstein said.
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