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Leasing concessions common

Otay Mesa's sluggish industrial leasing leads South Bay

Otay Mesa continued to pull on the South County industrial market in the year's first half, leaving some to wonder when all that space may be filled.

According to a Cassidy Turley mid-year report compiled by brokers Darren Mullins and Erik Parker, Otay Mesa returned 209,182 square feet to the market through the first half of the year.

As of June 2013, the Otay Mesa industrial market has 2.25 million square feet of direct vacant space available resulting in a vacancy of 15.6 percent.

While an improvement from the more than the 3 million square feet of empty industrial space on the mesa at the recession's peak, it is still 2.2 percent higher than the level of 2012's fourth quarter of 2012.

“There’s a lot of standing inventory,” Parker said. “Leasing is continuing to struggle.”

Parker said the buildings themselves present a challenge to brokers and landlords.

“They might not have the clear heights that you need today … we’re seeing some functional obsolescence,” Parker said.

Parker said two important variables that have hurt Otay.

One is a limited number of tenant migrations resulting in new lease transactions, while the second is a lack of existing tenants expanding into larger facilities.

The largest new transaction was Nery’s Logistics relocating from Chula Vista to lease approximately 28,645 square feet of refrigerated warehouse space for 36 months at 9925 Airway Road in Otay Mesa.

The per-square-foot charge on the Nery lease was 67 cents triple net -- a high figure that Parker attributed to the refrigerated space. Nery’s distributes produce throughout Mexico.

The average asking rental rate in Otay Mesa was 51 cents-per-square-foot triple net.

However, actual transactions have ranged from the high 30-cent to the 45-cent range for triple net transactions.

These rates had been lower during the recession, when rates reportedly got down into the mid 20-cent range.

“Free rent, tenant improvements, moving allowances and other concessions will remain a key component to the landlord-tenant conversation for the near term,” the report stated, adding that only new tenant migration and expansion will bring down vacancy and ultimately spark an upward trend in rental rates on Otay Mesa.

Otay Mesa wasn’t the only submarket in the South Bay that experienced sluggish activity.

Only 13 leasing transactions totaling 132,542 square feet were experienced across all South County submarkets. Of this total, nine were new leases (70,803 square feet), three were renewals (36,101 square feet) and one was an expansion (25,638 square feet).

The difference is while Otay Mesa has that 15.6 percent vacancy rate -- a rate that climbs to 16.6 percent with the sublease space added -- National City’s direct vacancy is 9.2 percent and Chula Vista’s direct vacancy is just 7.7 percent, according to the CT report.

Sales activity was stronger this quarter, with 10 transactions across all South County submarkets -- of these 10, one was a leased investment and two were REO sales.

The remaining seven transactions were straight-forward owner/user sales.

“The sales market on Otay Mesa is starting to show signs of improvement,” Parker said, adding there is a shortage of high quality industrial properties on the mesa.

“This high owner/user activity further demonstrates the increase in buyer demand, confidence in the recovery and an upward trend in property values,” the report added.

For example, during this quarter, Otay Mesa posted two ‘high watermark’ sales.

The first was an approximately 14,000 square foot industrial building located at 8765 Dead Stick Road, in Otay Mesa's One Piper Ranch, that sold for $1,078,000 to BHY Realty during the second quarter.

A second sale was that of a 31,302-square-foot building at 995 Bay Blvd. that sold for $3.25 million to CIRE Partners commercial investment firm.

The last South Bay sale listed in the CT report was that of a 10,000-square-foot industrial building at 1305 Wilson Ave. in National City that sold for $1.1 million during the quarter to Pell Mell Supply.

“The building sales market is clearly leading in the path towards recovery and stability in the South County industrial market [with] competitive lending rates," the report continued. "Low SBA rates and stronger company balance sheets are further pushing owner/users to own, rather than lease their real estate; despite the fact that ownership costs remain slightly higher than leasing.”

The report said that even with an upward trend in values, pricing has remained at levels that allow owner/users to pursue high quality buildings that several years ago may have been out of reach.

Parker said this buyer demand trend is expected to continue for the foreseeable future.

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