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Wave of new South County, Otay Mesa industrial construction to fuel surge in lease, sales activity

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A Burnham Real Estate industrial report shows that with South San Diego County, and Otay Mesa in particular, leading the county in new construction, the upcoming influx of new inventory will spur renewed leasing and sales activity through 2008.

According to the Burnham study, Otay Mesa is the county's largest industrial submarket with nearly 12.65 million square feet of space. Additionally, the market's 1.21 million square feet of new space under construction at mid-year 2007 represents more than half of total San Diego County building activity. More than 1 million square feet of this new space is being completed in the third quarter.

"The relative affordability of land in Otay Mesa compared to other San Diego County industrial submarkets is driving this growth," said Charles Adolphe, vice president with Burnham Real Estate. "While both leasing and sales activity slowed in 2007 compared to prior years, I believe the continued strength of regional economic fundamentals, coupled with the Fed's recent cut in interest rates by one-half of a percentage point, will renew consumer confidence. Companies should see a new window of opportunity to lease or buy the space they need at more affordable rates and prices. The continued availability of SBA financing contributes to this positive energy we are seeing."

Several of Otay Mesa's 1 million square feet of new construction projects have just finished, or are nearing completion, in the third quarter. These include Ocean View Hills Corporate Center, a six-building, 661,300-square-foot project on the western end of Otay Mesa Road; and Three Piper Ranch, a two-building, 333,000-square-foot project adjacent to the future state Route 125 interchange. Additionally, Britannia Industrial Park, which includes five warehouse buildings totaling approximately 156,000 square feet located at the northeast corner of Britannia Boulevard and Siempre Viva Road, is scheduled for completion in the second quarter of 2008.

"This is not a time to stand on the sidelines," Adolphe said. "Owners will be competing for tenants, providing an ideal opportunity for businesses looking for affordable space in South County."

The Burnham Real Estate report shows that while the Otay Mesa industrial market reported just 13,416 square feet of positive net absorption at mid-year 2007, gross tenant activity -- which includes all leases (including subleases and renewals) and owner-user sales -- totaled nearly 500,000 square feet.

The largest industrial lease in San Diego County signed in the second quarter occurred in Otay Mesa, with a 154,700-square-foot commitment by Imperial Toys in Three Piper Ranch. The company will relocate from Los Angeles to Otay Mesa upon completion, positively impacting net absorption.

Other notable transactions include Circle Foods' recent lease for 157,000 square feet in Siempre Viva Business Park, which it will occupy in April 2008; Expeditors International, which signed a lease for 54,657 square feet at Ocean View Hills Corporate Center, with occupancy slated for next month; and E&J Holdings, which signed a lease for 61,599 square feet at Britannia Corporate Center and occupied its space in September.

"We expect absorption to gradually improve over the remainder of 2007 and into 2008 as tenants who signed leases take occupancy," said Ryan Spradling, senior associate with Burnham Real Estate.

Adolphe and Spradling agreed that the 12 percent vacancy rate in Otay Mesa will temporarily increase as newly completed space waits to be absorbed. However, this creates more incentive for owners and a great opportunity for tenants and buyers to negotiate favorable lease and purchase terms.

Burnham Real Estate reports the average asking rents for Otay Mesa in the $0.60 NNN range per square foot, which is low compared to the countywide average of $0.88 per square foot (rents are calculated by the blended average of light industrial, multi-tenant and warehouse combined).

"Otay Mesa is one of the few areas in San Diego County where opportunity to lease large amounts of contiguous space at affordable prices still exists," Spradling said.

Added Adolphe: "With the abundant amount of new industrial space coming to Otay Mesa, it will be exciting to watch the economic growth of this submarket. The housing market has seen the completion of thousands of new homes over the past few years, and renewed commercial activity will contribute to the absorption of homes still on the market."

Another benefit for both residents and businesses, he said, is the anticipated completion of state Route 125, which connects Otay's industrial business area to the business and residential community of EastLake.

"This combination of affordable industrial properties, abundant executive and work force housing and tremendous improvements in infrastructure, are all converging to position South County as one of the most desirable areas for businesses to locate," Adolphe said.

Grove is president and Haney is account executive with The Grove Agency.

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