This year is expected to be the strongest year for industrial leasing since 2006, despite a lackluster third quarter, according to a new Cushman & Wakefield report
The report found that even with negative 16,000 square feet of industrial absorption in the third quarter, the county still managed to gain a net of about 1.28 million square feet through the first three quarters of the year.
Overall industrial leasing activity reached more than 10.3 million square feet within 2012's first three quarters, 19.7 percent ahead of the pace seen during the like period last year.
From the second to the third quarter, both direct and overall (including sublease space) vacancy rates remained unchanged at 9.2 percent and 10.4 percent, respectively.
However, at the end of third quarter last year, the rates were 10.1 percent direct and 11.6 percent overall.
The manufacturing/warehouse segment of the market maintained positive absorption in the third quarter, totaling 185,542 square feet. This brings the year-to-date total for the sector to 935,021 square feet.
A few significant tenancy changes created 202,317 square feet of negative net absorption in the R&D sector during the third quarter, though year-to-date absorption remains positive at 344,136 square feet.
The Torrey Pines submarket returned 108,940 square feet to the market during the third quarter. This result was heavily affected by the return of about 350,000 square feet of former Pfizer buildings to the submarket when a Legacy Partners entity acquired the campus in August.
Pfizer (NYSE: PFE), which had owned the buildings and previously occupied the space, was not filling the buildings at the time of the sale.
Torrey Pines now has a direct vacancy rate of 11.7 percent and an overall rate of 13.7 percent.
The Otay Mesa submarket, which had more than 3 million square feet of vacant industrial space through the recession and beyond, managed 666,602 square feet of net absorption through the first three quarters of the year, bringing the vacant industrial space down to about 2.4 million square feet.
The vacancy rate, which had been higher than 20 percent by most accounts through much of the downturn, stood at 14.4 percent for direct space and 15.2 percent overall as of Sept. 30.
The overall vacancy had been 21.6 in the third quarter of 2010 and 24.7 percent in the third quarter of 2011 according to C&W.
Chris Holder, a C&W director, said while the activity has been good on Otay Mesa, the rents are still flat for the time-being. These rents are averaging only about 47 cents per square foot, about 45 percent less than the county average of 86 cents per square foot.
Although the rents on Otay Mesa aren’t what he would like yet, Holder is very happy about the trajectory of the market.
“The big Class A spaces are starting to fill up,” Holder said.
Holder noted that during the past three months, C.P. Manufacturing, a maker of recycling equipment, took up 115,000 square feet along Calle Delinea in the International Business Center. That firm is relocating from National City.
U.S. Joiner is moving out of one space into a slightly larger 85,000-square-foot site in the International Business Center as well. The IBC was originally conceived by the Trammell Crow Co. in the early 1980s.
Holder said he is fairly sure that Otay Mesa has seen the worst of the downturn.
“I think all the distressed sales have kind of happened,” Holder said.
Meanwhile, in the North County area, a strong first half has made up for a weak third quarter.
“Despite 203,338 square feet of negative absorption in the third quarter, year-to-date absorption remains positive at 233,632 square feet. As a result, overall vacancy ended the third quarter at 10.8 percent, down from 11.2 percent one year prior,” C&W writes.
The third quarter vacancies ranged from a high of 14.6 percent in Carlsbad to a low of 7 percent in Vista.
C&W directors Ron King and Bob Willingham said while there were some building sales in the North County during the third quarter, the problem was there just weren’t that many available.
“If you want a building that’s more than 10,000 square feet, it’s hard to find,” said Willingham. “If you can find a decent building to purchase, you can buy it for 10 percent down and it will end up costing less than a lease.”
King noted that finding suitable land is also becoming more difficult. This scarcity means while it still is cheaper to buy than to build, the difference is no longer so great.
King said a problem he is having is most tenants believe “they should still get phenomenal rents.”
“Rents have to grow now,” King said, adding that this should lead to some speculative construction where sites are available.
The speculative construction will take capital, and King said lenders are much tighter with the purse strings today.
“And you won’t convince lenders the project makes sense unless it makes sense from a leasing standpoint,” King added.
There has been quite a bit of leasing activity in the North County including Brown Safe moving out of about 30,000 square feet in one part of San Marcos into 65,000 square feet in another part of the city; and Encinitas-based Nixon Watches adding a 50,000-square-foot warehouse in Carlsbad.
A bit further south in Poway, Mickey Morera, a C&W senior director, said with only about a 4.3 percent vacancy, he's hopening some speculative building happens soon.
"There actually hasn't been much leasing because there is a scarcity of buildings," Morera said.