San Diego's Three Mid-County Industrial Markets Show First Positive Absorption in Two Years
5 May, 2010, San Diego
A just released report by Cushman & Wakefield shows that for the first time since 2007, all three of San Diego County's major central county industrial markets recorded positive absorption - a sign that confidence in the industrial sector is gradually being restored.
"Historically, the desirable San Diego central county submarkets are the first to recover and lease-up after a downturn," said James Duncan, director with Cushman & Wakefield. "This is still a very challenging time for businesses, but the improved absorption numbers indicate that more companies are recognizing that now is the time to take advantage of the tenant-favorable leasing climate before it's too late."
According to the Cushman & Wakefield report, the I-15 Corridor, Mid-City and Central Suburban major market areas reported a combined total of 335,820 square feet of positive absorption for the three months ending March 31, 2010. Leading the way was Mid-City, which realized 251,098 square feet of direct positive absorption.
"Mid-City is historically the county's most popular and stable industrial region, comprised of Miramar, Sorrento Mesa, Sorrento Valley and Eastgate/Campus Point," said Duncan. "In the first quarter we saw all of these submarkets - with the exception of Miramar - report positive activity.
"Also of note is the fact that nearly 60 percent of the direct Mid-City absorption occurred in 'other' areas," he said. "This reflects the county's biggest lease of the quarter, a 141,214 square foot commitment by Mitchell International in Governor Park."
Sorrento Mesa recorded 41,100 square feet of direct positive absorption, followed by Eastgate/Campus Point with 37,463 square feet; Torrey Pines, with 22,011 square feet; and Sorrento Valley with 4,810 square feet. Miramar reported 269 square feet of direct negative absorption, a sign that 2010 should be much improved over 2009 when the area recorded direct negative absorption of 489,899 square feet.
The I-15 Corridor submarkets, which include Poway and Rancho Bernardo, reported 60,573 square feet of direct positive absorption. As with Mid-City, most of this activity (87.7 percent) occurred in 'other' areas. In this case, Enxco Inc. signed a 51,200-square-foot R&D lease at 15445 Innovation Dr. in Carmel Mountain Ranch. This, combined with Poway's 24,831 square feet of direct positive absorption, helped offset the 17,400 square feet of direct negative absorption reported by Rancho Bernardo.
The Central Suburban market of San Diego - which predominantly consists of Kearny Mesa - reported 24,149 square feet of direct positive absorption. Kearny Mesa was responsible for this improvement, finishing the quarter with 44,600 square feet of positive activity. Unlike Mid-City and the I-15 Corridor, 'other' areas in the Central Suburban region reported direct negative absorption of 20,459 square feet.
Despite the improved performance of these three major market areas, San Diego County overall reported negative 124,093 square feet of net absorption for the first three months of the year. The Cushman & Wakefield report shows that this was due directly to South Bay and North County, which reported negative direct absorption of 213,307 square feet and 102,717 square feet, respectively - offsetting mid-county's positive performance.
"Comparatively, however, this is a significant countywide improvement from the first quarter of 2009, when negative absorption of 847,511 square feet occurred," Duncan said.
The Cushman & Wakefield industrial report shows that gross leasing activity, which includes direct leases and subleases but not renewals, totaled 2,421,887 square feet as of March 31, 2010. This is up 46 percent compared to the same time a year ago.
The study also shows that first quarter 2010 direct vacancy (excluding sublease space) for San Diego County is 10 percent, up from 8.2 percent during the same time in 2009.
"Vacancy has risen in correlation to decreased demand and industry consolidations, but at 10 percent compares favorably to other U.S. markets" said Duncan. "Kearny Mesa is the tightest of all major San Diego industrial markets with just 5 percent vacancy. The northern and southern parts of the county continue to fare the worst with 10.9 percent and 13.6 percent, respectively."
Cushman & Wakefield research shows that as of March 31, 2010, countywide average direct asking rents (NNN) were $.87-per-square-foot per month, down from $.99-per-square-foot per month at the same time a year ago. These rents include upward pressure from the research and development sector, which averages $1.28-per-square-foot per month. The R&D sector - which recorded 285,739 square feet of direct positive absorption in the first quarter - has seen improved performance as many former Class A and Class B office users have shifted to R&D as a cost-saving alternative to higher-priced office space.
"Landlords remain focused on occupancy and continue to be aggressive with concessions and incentives," said Duncan. "That said, with more tenants shopping the market and more long-term leases being signed, therefore, countywide rent decreases in 2010 shouldn't be nearly as significant as we've seen in the past 12 months."
In addition to the leases signed by Mitchell International and Enxco Inc., notable first quarter leasing activity also included Covance Inc., which signed a 44,806-square-foot R&D lease at 10300 Campus Point Dr. in Eastgate; and Roka Bioscience, which signed a 43,645-square-foot R&D lease at 10398 Pacific Center Ct. in Sorrento Mesa.
Construction has nearly stopped also helping with the absorption of unoccupied space countywide. The 121,984-square-foot Vista Commerce Center is the only project under construction.
"Overall it's expected that absorption will continue stabilizing throughout 2010," said Duncan. "While some markets will bounce back more quickly than others, the exceptionally high levels of negative absorption that we saw in 2009 have likely subsided."
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