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Study shows demand for industrial space getting stronger

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Demand for San Diego industrial space just keeps getting stronger, according to a study released by Burnham Real Estate.

According to the Burnham report, the 1,136,370 square feet of third quarter net industrial absorption is up 24 percent over the prior quarter when 914,518 square feet of space was absorbed.

Year-to-date, the San Diego County industrial market has absorbed nearly 3 million square feet of space, nearly triple the 1,294,062 square feet of net absorption recorded in all of 2004.

"The local industrial market is on track for its best year since 2000, when 4.6 million square feet of space was absorbed," said Charles Adolphe, a vice president and industrial specialist with Burnham Real Estate. "Our original projections that the industrial market would absorb 2,600,000 square feet of new space in 2005 have already been surpassed. In fact, demand for industrial space is far outpacing new construction, with the 3 million square feet of net absorption so far this year representing approximately two-and-a-half times the amount of new space completed as of September 30, 2005 (1,228,000 square feet)."

Burnham Real Estate attributes this robust momentum to overall improved confidence in the market and a desire by companies to lock in lease or purchase commitments for space now in light of the anticipated supply shortage due to the lack of affordable land for new development.

"This shortage is already very apparent in central submarkets, such as Kearny Mesa, Miramar, Sorrento Mesa and Carlsbad, where land prices are too high to justify new industrial/warehouse construction," said Burnham Vice President Chris Holder, SIOR.

When evaluating vacancy, it is important to note that Burnham Real Estate now tracks owner-user inventory and leasable inventory separately. Of the 106,234,668 square feet of total industrial inventory in San Diego, 30,259,432 square feet -- or 24.5 percent -- is owner-occupied.

"Because of the increasing number of companies who want to own their facilities, rather than lease, it is important to track these categories separately in order to fully understand current market dynamics," said Adolphe.

Industrial vacancy based on leasable inventory stands at a low 8 percent, down from 9.3 percent as of year-end 2004, the Burnham report shows. When owner-user buildings are included, vacancy is an even lower 5.7 percent, down from 6.6 percent nine months ago.

"Vacancy will continue to decline as increasingly strong tenant demand exceeds current supply," said Holder.

Currently, just 1,370,000 square feet of new industrial construction is under way throughout San Diego County. While the amount of speculative development has increased -- accounting for 86.9 percent of the new space -- demand by users to own their facilities remains as strong as ever.

"Our mantra is build it and they will buy," said Adolphe. "Lease rates have remained relatively flat while the sales price per square foot continues to increase in response to buyer demand. Still low interest rates are supporting this activity, along with the recognition that a limited supply of land for development and strong real estate fundamentals make owning very desirable for many companies."

In South County, Adolphe notes that of 654,000 square feet of new construction, 405,000 square feet is spec space for purchase in two projects, Opus Crossing and Piper Ranch and a large percentage of that is already in escrow.

R&D net absorption is tracking well below last year, with just 313,120 square feet of activity compared to 818,626 square feet in all of 2004. Most of the year-to-date absorption (212,203 square feet) occurred in the second quarter, and more than half of this was located in North City in Sorrento Mesa. Vacancy of 14.7 percent on leasable inventory compares to 15.2 percent nine months ago. There are just 260,792 square feet of new construction under way, 60 percent of which is located in Carlsbad.

"The slowdown in construction is the result of decreased R&D demand that occurred between 2001 and 2004 when the wave of attractively priced office space that hit the market created opportunity for many R&D users to upgrade their space," said Holder. "Now that the office market has regained its balance and rental rates are rising, the R&D market should see stead improvement in 2006 and 2007."

Individual submarket highlights of the third quarter Burnham Real Estate report are as follows:

South Bay -- The South Bay region of the county is the county's largest industrial market with 21,539,480 square feet of space. Of this, 7,508,565 square feet is owner-occupied. Overall, the Burnham study shows that South Bay vacancy on leasable space stands at 13.5 percent, and when owner-occupied buildings are considered, at a low 8.8 percent. The South Bay region leads the county in net absorption (784,349 square feet) and new construction (674,649 square feet), with most of the tenant and building activity taking place in Otay Mesa. Of the 654,649 square feet of new development in progress in Otay Mesa, 320,000 square feet is located in Opus Crossings and 85,000 square feet is in Piper Ranch Industrial Center.

Highway 78 Corridor -- The Highway 78 Corridor accounts for the second highest amount of new construction, with 464,870 square feet of new space under way. The Burnham report shows that Vista has surpassed Miramar as the county's largest industrial market with 10,537,814 square feet of total inventory. The area reports 253,519 square feet of new industrial construction and low 6.3 percent vacancy include owner-user facilities. Oceanside has 211,351 square feet of new development, most of which is concentrated in the La Pacifica at Ocean Ranch project by Cruzan Monroe. These markets will continue to see more development as demand for space moves to the northern and southern regions of the county where land is priced right and more available for industrial product.

I-15 Corridor -- In the late 1990s and early 2000s, Poway became a popular alternative to central markets like Sorrento Mesa where the land supply is limited and prices have skyrocketed. The area's industrial inventory now totals 6,714,739 square feet, making it the county's seventh largest submarket. Burnham reports that demand for space in Poway is high, evidenced by 522,625 square feet of year-to-date absorption and leasable vacancy of just 5.3 percent. New construction of 164,619 square feet is located Poway Corporate Center and Pomerado Business Park.

Rancho Bernardo -- Rancho Bernardo realized 115,312 square feet of net absorption with new tenants including JMAR Technologies Inc., San Diego Volleyball Club and SCKAY Enterprises. Vacancy in this relatively small industrial market (3,751,266 square feet of total inventory) is a very low 3.9 percent on leasable inventory and just 1.1 percent when owner-user buildings are included.

North City -- Miramar, which is the county's oldest and most established submarket, reports the lowest leasable vacancy rate of all major submarkets -- 2.7 percent. Its vacancy rate on total inventory including owner-user facilities is even lower at 2.3 percent. Now ranking as the county's second largest industrial market, Miramar is dominated by older industrial/warehouse facilities and there is little if any land for new development. Net absorption of 508,023 square feet during the first nine months of the year was accounted for by tenant move-ins Teledyne Technologies, Classic Party Rentals, Bedrosian Tile and Asteries just to name a few.

Sorrento Mesa -- Sorrento Mesa reports 273,813 square feet of year-to-date net industrial absorption with vacancy on leasable inventory now standing at a much improved 12 percent. With total industrial inventory of 3,590,430 square feet, Sorrento Mesa ranks as the county's 12th largest industrial market. On the R&D side, however, Sorrento Mesa holds first place with 5,832,548 square feet of inventory. Vacancy of 12.4 percent on leasable inventory could increase over the next several months as the first phases of Fenton Technology Park come on line. However, leases have already been signed by Z Microsystems (36,885 square feet) and Manpower Inc. (8,612 square feet) for space in the first two phases of the project and the project is expected to absorb quickly.

For more information on Burnham Real Estate, visit www.burnhamrealestate.com.

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