Otay Mesa's industrial market has a long way to go -- while much of the South Bay may be suffering from obsolete space.
A newly published CBRE (NYSE: CBG) South County report, that includes downtown San Diego in its industrial inventory, provide a mixed picture of the industrial market south of Interstate 8.
Otay has had net absorption, but how much varies widely depending on the survey.
At the end of the second quarter 2014, CBRE reported Otay Mesa had a direct vacancy rate of 12.7 percent.
The market had 69,903 square feet of net absorption in the second quarter for a total net of 246,870 square feet through the first half of the year.
A Cushman & Wakefield report stated Otay Mesa net absorption was an even better 458,713 square feet.
Factors accounting for these discrepancies include the sample's timing, including the building's minimum size and whether a leased but unoccupied building is considered "occupied."
Cassidy Turley -- which divided its survey down to the level of South County -- reported that 66,634 square feet was returned there in the second quarter, and recorded a modest net absorption of 65,138 square feet for the first half of the year.
The CBRE report stated transactions contributing to Otay Mesa's absorption included leases totaling 69,680 square feet at the Britannia Industrial Park, and 14,481 square feet at the Empire Centre on Airway Road.
The lessees in those transactions included and the R&R International freight forwarding firm and Reliant Customshouse Brokers.
Average asking rental rates in Otay Mesa across all sizes fell slightly to 46 cents per square foot, triple net in the second quarter, whereas Chula Vista and National City inched higher to 69 cents per square foot, triple net.
Industrial property sales are especially strong in the owner user segment, CBRE stated.
"Fueled by low [Small Business Administration] financing rates and a limited supply of high quality, functional real estate, buyers are struggling to identify viable options that make sense for long term needs," the report added.
Significant sale transactions this quarter included an approximately 115,290 square foot industrial building on 7.58 acres, at 8851-8877 Kerns Street in Otay Mesa, for $8.15 million; an approximately 11,845 square foot industrial building on 0.65 acres, at 2212 Verus Street in Chula Vista, for $1,425,000; and an approximately 7,500 square foot industrial building on 2.76 acres, at 2520 Cactus Road in Otay Mesa, for $1.5 million.
Darren Mullins, a Cassidy Turley senior vice president, said larger transactions of more than 10,000 square feet -- either for sale or lease -- remain few and far between, and whether the industrial buildings are in Otay Mesa or Chula Vista, there just aren't many for sale.
Mullins said the leasing activity isn't what he would like. "Otay Mesa continues to underperform," he said. "There's not a whole lot of leasing in that market. In fact, the entire South County is underperforming."
CBRE's Erik Parker reported that while Otay Mesa continues to struggle, vacancies in Chula Vista and National City are expected to tighten, putting upward pressure on rental rates.
Mullins said for speculative construction to return on Otay Mesa, not only would much of the 2 million square feet of vacant space need to be leased, but actual Class A rental rates would need to climb from the high 30-cent range today to 60 cents or higher.
The CBRE report stated as this year continues, tenant and buyer activity is expected to remain stable with more lessees and prospective buyers exploring opportunities.
"Tenants evaluating space options in Otay Mesa will continue a 'flight-to-quality' approach [because] lease rates for newer, high- quality buildings will be just slightly higher than that of functionally inferior projects," the report added.
By CBRE's accounts, Chula Vista and National City's approximately 6.4 percent of vacancy, out of an 11.47 million-square-foot market, looks strong at face value.
However, it reported that 124,953 square feet of industrial space was returned in this sub-area in the second quarter, which translates to a return of 48,683 square feet at mid-year.
Finally, in a market that includes much of downtown San Diego, CBRE said industrial vacancy was 5.2 percent at the end of the second quarter -- though 26,132 square feet was returned in the year's first quarter and 102,808 square feet was returned through the second quarter.