In South San Diego County, all commercial property types are exhibiting higher rates of vacancy than in other submarkets in the region as a result of higher unemployment rates and high residential foreclosures and short sales.
The South County retail market, much like its counterparts across the country, is suffering from a decline in consumer spending. Though this trend is evident across the nation, the South County retail market has been hit harder than most. According to Voit Real Estate Services' first-quarter market reports, the retail vacancy rate in San Diego's Southeast Corridor/South San Diego submarket was approximately 4.28 percent, versus 3.94 percent in the North City and 3.74 percent in the Central Suburban submarkets. Office
The South County office market has been similarly impacted. According to Voit's first-quarter market reports, the office vacancy rate in San Diego's Southeast Corridor/South San Diego submarket was approximately 17.08 percent, whereas the average vacancy rate for San Diego's office market was 16.03 percent.
Prior to the global economic decline, the real estate industry was flourishing in South County. Driven by the demand for local housing, residential and commercial developers from across San Diego expanded into South County, significantly increasing the supply of office space. As the real estate markets have subsequently declined and the commercial and residential development industries have been forced to contract to a greater extent than most other industry sectors, office vacancy rates in the South County have climbed to higher levels than in other San Diego markets.
In comparison to the retail and office markets, the industrial market has recorded the greatest difference between vacancy rates in the South County and the rest of San Diego. The South Bay industrial vacancy rate finished the first quarter at 11.28 percent, despite an average rate of 7.09 percent vacancy for the whole of San Diego County.
In large part, this can be attributed to the Otay Mesa submarket, which accounts for approximately 48 percent of the market and recorded a vacancy rate of 17.5 percent. This is a result of the significant amount of new development added to this market in recent years.
However, other South County industrial vacancy rates have remained relatively low due to the smaller inventory base, which has helped maintain a healthier balance of supply and demand. For example, in National City, the vacancy rate was 0.8 percent at the end of the first quarter. Nonetheless, if consumer spending continues to remain low and more retailers go out of business, the warehousing and manufacturing industries could see a drop in demand and be forced to contract.
While this sector was being touted by some as recession-proof, it is also experiencing some difficulty. Landlords are starting to see a decline in rents for the first time in a decade and vacancy rates are on the rise. This has been a result of pressure from a growing shadow product. Tenants can now rent a house or a condo that was purchased by an investor and is being kept as a rental. The contracting economy and high unemployment rates have caused a lot of family consolidations, which exacerbates the problem.
Despite current turmoil in the market, Voit believes that South County will remain a popular destination for companies and investors. Companies in more stable industries with solid balance sheets are looking to take advantage of the bargains that they can drive.
South County's high population density, positive population growth, favorable local demographics, proximity to downtown San Diego, the San Diego airport, defense installations and the border will drive future investment and leasing activity in the area. Thus, investors and tenants are likely to view the South County with an eye to acquire property and lease space.
Wells, CCIM, is vice president of Voit Real Estate Services' Commercial Brokerage's San Diego Office.