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Industrial space continues to decline

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While surveys by Colliers International and The CoStar Group may differ, it appears that the county's industrial vacancy is continuing to decline.

By CoStar's (Nasdaq: CSGP) accounts, the industrial vacancy -- in double digits during the recession -- had declined to 7.2 percent at the end of the third quarter this year.

Colliers, which showed a similar figure, said the industrial vacancy should reach an even 7 percent by the year's end.

"This would put vacancy down to level that was last seen nearly eight years ago," Colliers wrote.

CoStar said some 910,631 square feet of net absorption was experienced in the third quarter, and both agree that more than 2 million square feet of net industrial absorption has occurred since the year began.

Colliers reported the quarterly net absorption trend in industrial/R&D space in San Diego County continues to be unbroken in more than three years.

"The majority of the county’s submarkets continued to see positive demand in the third quarter with submarkets such as Otay Mesa (151,538 square feet), Poway (117,797 square feet) and South Bay (109,465 square feet) leading the pack," Colliers stated. "Only six submarkets experienced negative demand in the third quarter, all of which were less than 14,000 square feet each."

Colliers added that only Campus Point/Eastgate has seen significant loss with a negative 365,479 square feet of net absorption during the quarter.

This was driven primarily by phased move-outs of LPL Financial (NYSE: LPL) from several flex buildings totaling over 316,000 square feet.

Colliers pointed out that the flex space LPL moved out of is different from the upscale 400,000-square-foot office building the firm moved into at La Jolla Commons in the University Town Centre area.

There was lateral movement through the year's third quarter.

According to CoStar, tenants moving out of large blocks of space in 2014 include Entropic Communications, Inc., out of 90,000 square feet at the Sequence Technology Center at 6290 Sequence Drive in Sorrento Mesa; Digirad Corp., out of 47,064 square feet at 13950 Stowe Drive; and White Cap Construction Supply, vacating (26,546) square feet at 3451 Main Street in Chula Vista.

Tenants moving into large blocks of space in 2014 include Entropic Communications, Inc., into 132,600 square feet at 6350 Sequence Drive in Sorrento Mesa; Dr. Bronner’s Magic Soaps, into 118,597 square feet at 1335 Park Center Drive; and Otay Mesa Scales, into 90,538 square feet at 8851-8877 Kerns Street on Otay Mesa.

By CoStar's accounts, the largest lease signings in 2014 included the 105,636-square-foot lease signed by Alesmith Brewing Co. at 9990 Empire St. -- at the Miramar Distribution Center -- and the 70,996-square-foot deal signed by Marshall Freight, Inc. at 7385 Mission Gorge Road in the Mission Trails Industrial Park.

CoStar reported the average quoted asking rental rate for available industrial space was $10.57 per square foot per year the county, at the third quarter's end.

This represented a 1.5 percent increase in quoted rental rates from the end of the second quarter, when rents were reported at $10.41 per square foot.

"Rates are expected to pick up pace -- particularly in R&D space -- and continue to rise throughout the remainder of 2014 and throughout 2015," Colliers added.

Large, well-located industrial buildings are in high demand when available.

One of the largest transactions occurring within the last four quarters in the San Diego market is the sale of 3545 Cray Court in the Torrey Pines submarket to Alexandria Real Estate Equities (NYSE: ARE).

This 116,556-square-foot industrial building sold for $64 million or $549.09 per square foot earlier in the year.

CoStar reported that one building was delivered in the third quarter: a 155,000-square-foot structure at 14105 Kirkham Way in Poway, completed for General Atomics in August.

The 14105 building, Colliers noted, is the first up in HCP's (NYSE: HCP) planned 280,000-square-foot Ridgeview Business Center.

"Year to date, 341,579 square feet has been completed which includes a 156,421 square-foot speculative building on Business Park Drive in Vista and a 70,158 square-foot build-to-suit for EagleBurgmann (specialist in industrial seals) in Lakeside," according to Colliers. "Nothing additional is under construction or slated for completion by [the year's end]."

Colliers reported that a total of 3.9 million square feet of potential industrial space is somewhere in the pipeline.

"As the market continues to improve, we will likely see more new build-to-suit and speculative construction break ground over the next couple of years," Colliers added.

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