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Industrial leasing picks up, but not much building happening in county

The national picture for industrial real estate generally continues to improve, but the recovery remains uneven and site-specific, according to Costar Group's national research director.

"It's nice to see that San Diego has some (industrial leasing) activity," but significant speculative construction here is another story, Costar Group's Rene Circ said.

Circ, addressing CoStar offices across the United States in a webinar Thursday, said San Diego County is hardly building despite a healthy 7.6 percent overall vacancy rate that includes sublease and direct space.

CoStar reported that the only industrial project that was under construction in the entire county at the end of the first quarter was an 115,000-square-foot industrial building at 14105 Kirkham Way in the Ridgeview Business Park in Poway.

General Atomics is slated to take the entire space at the beginning of August.

Notable deliveries that happened during the first quarter included 2450 Business Park Drive, a 156,421-square-foot facility in Vista that is 72 percent occupied; and a 70,158-square-foot building at 10038 Marathon Parkway in Lakeside that is 100 percent leased to EagleBurgmann EJS, a manufacturer of pipe expansion joints.

By contrast, Circ noted that some 14.2 million square feet of industrial space was under construction in Southern California's Inland Empire as of March 31.

Donald Hall, a CoStar real estate economist, said what is extraordinary about the Inland Empire figure "is that most of it is (speculative) construction."

That so much space is now under construction in the Inland Empire market is notable given that this area was deemed to be vastly overbuilt five years ago.

Circ added that there has been enough construction in many markets, such as the Inland Empire, that it might take an additional 18 months before the vacancy starts heading down to pre-construction levels.

Shaw Lupton, CoStar senior real estate economist, said the good news is that some 9 million jobs have been regained since the end of the recession.

"We're within two months of matching our peak employment in the U.S.," Lupton said.

Circ said that while it is likely there will be another recession within the next five years, there is no reason to panic just yet.

Circ and Lupton were somewhat disappointed that there were only about 42 million square feet of industrial absorption nationally in the first quarter versus 66 million in the last quarter of 2013. That said, CoStar cited an NAIOP study projecting there will be a record 250 million square feet of industrial absorption in the U.S. in 2014.

Lupton said such factors as increased goods consumption, truck traffic and industrial production bode well for industrial leasing.

Circ said industrial lease rates have begun to rise in many areas, but, Hall said, "It will be interesting to see how much rents will need to rise to justify new construction."

Just what the industrial rents cost in San Diego County depends on the submarket. The average for the first quarter was 86 cents under a modified gross formula. This includes all industrial and flex buildings. The rental rate drops to about half that in Otay Mesa, which still has about 2 million square feet of vacant space.

Lupton said that besides considering rental rates and vacancy, another factor in whether a proposed project is viable is whether it is a light industrial, warehouse, heavy industrial or flex building.

"There's this myth that all industrial is the same," Lupton said.

"There are warehouses, distribution centers -- a lot of these buildings are each larger than 1 million square feet," such as in the Inland Empire, Circ said.

Lupton agrees.

"There are a number of economic trends that will be driving the demand for ‘big boxes,’" Lupton said, noting Amazon's need for huge warehouses.

Hall said big boxes aren't the only industrial spaces being sought after these days.

"From 2010 until now, light industrial has been on a tear," Hall said.

Given that there is very little industrial construction in San Diego County and that most submarkets (Otay Mesa being a notable exception) are quite tight, well-located, and reasonably high-quality buildings are expected to continue to be in high demand here.

CoStar concluded that buyers paid $205 million for 58 industrial properties in San Diego County during the first quarter.

The big biotechnology real estate investment trust Alexandria Real Estate Equities (NYSE: ARE) led the way with the $64 million, 116,556-square-foot building sale at 3535 Cray Court in January.

Alexandria's acquisition was followed by followed by Solana Beach-based SR Commercial's $12.54 million acquisition of five properties totaling about 168,000 square feet along Joshua Way, La Mirada Drive and Park Center Drive in Vista; and Sorrento West Properties' $11.5 million acquisition of the 80,878-square-foot industrial/manufacturing building at 14020 Stowe Drive in the Parkway Business Centre in Poway.

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