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Vacancy rates for industrial space at lowest in years

A Cassidy Turley report concludes the industrial vacancy rate fell for the seventh consecutive quarter during the first three months of the year -- ending at 9.3 percent -- its lowest level since mid-2011.
The report tallied 366,165 square feet of net absorption for the first quarter. That meant that more than 4 million square feet of space has been absorbed countywide since June 30, 2011 -- equating to a quarterly average of 577,000 square feet.

“We are seeing a slow and steady rebound in the industrial market with sustained improvements in net absorption, decreasing vacancy and stabilizing rents,” said Bryce Aberg, senior vice president with Cassidy Turley San Diego’s industrial division.

“While we have yet to reach pre-recession activity levels, which averaged 648,000 square feet of quarterly net absorption in 2006 and 2007, the market should continue to improve at a measurable, healthy rate throughout the rest of 2013 and into 2014.”

CT found that of 4,949 existing properties surveyed, 4 percent reported positive absorption of 2.21 million square feet, 4 percent reported negative net absorption of 1.85 million square feet, and 92 percent had no activity. The average move-in space size was 10,486 square feet, up 36 percent from a year earlier compared to an average move-out size of 9,186 square feet.

"Businesses are gradually expanding again, with most of this movement driven by smaller companies who had significantly downsized or stayed static with their space during the recession,” Aberg said. “With confidence in the economy returning, we expect to see modest but steadily improving growth as companies boost their production and hiring plans.”

Andy Irwin, another Cassidy Turley senior vice president San Diego, agreed with Aberg’s assessment.

“Vacancy rates have been declining steadily due to an emergence of new tenants in the marketplace coupled with the existing tenant base finally moving forward with expansion plans they had held off during the downturn,” Irwin said.

“In core markets, vacancy rates are approaching the early mid-2000 level,” Irwin said. “Rent growth is following this trend with measured increases over the last three quarters.”

Countywide vacancy for all industrial product types, including sublease space, has fallen steadily with improved absorption. The current rate of 9.3 percent compares to the peak rate of 12.7 percent as of fourth quarter 2009, and is 160 basis points below the five-year quarterly average of 10.9 percent. In keeping with historical trends, the popular central county area reports the lowest vacancy, 7.4 percent; followed by North County at 8.9 percent; and South County at 10.6 percent.

CT found that South County had 3.19 million square feet of space that was vacant in the first quarter as of March 31. That translated into an 11.6 percent vacancy rate.

While this particular report didn’t break out Otay Mesa, that submarket accounts for roughly 2 million square feet of that available space. As high as this figure is, more than 3 million square feet of industrial space was vacant as recently as three years ago.

CT reported that asking industrial rents have been flat during the past three years despite the improved occupancies -- narrowly hovering between 79 and 81 cents triple net.
A different picture emerges when looking back longer than three years.

“The average asking rent in the first quarter was 81 cents, which is actually 16.5 percent lower than the 97-cents-per-square-foot, per month pre-recession rate in 2007,” Irwin said. “We anticipate that average countywide asking rents will improve by another between 3 to 5 percent in 2013 as leasing gains momentum, particularly in the popular central county submarkets.”

Central county already leads the rent recovery with average monthly asking rents of 98 cents per square foot as of the end of March -- up 6.5 percent over the like quarter in 2012. North County followed with an average asking rate of 75 cents per square foot per month, and South Bay was in last place with an average asking rate of 58 cents per square foot per month.

That 58 cents might not sound like much, but the lowest rates in Otay Mesa went as low as half that figure during the recession, and by most accounts, have slowly been climbing back since 2010.
CT said it is encouraged tenants are actively seeking to fill 4.8 million square feet of space within the next 24 months. Of this, 2.1 million square feet is located in the central and south county areas combined. Nearly all the remaining 2.7 million square feet is located in North County.

“Most of this demand is coming from the manufacturing, technology, life science, and construction sectors,” Aberg said. “While not all of the current tenants in the market will transact in the short-term, leasing activity is set to strengthen.”

Irwin agrees.

“With no new speculative construction, existing inventory will continue to absorb further stabilizing the market,” Irwin said.

With industrial construction at a virtual standstill and properties leasing up once more, CT notes investors have been jumping in to purchase well-located buildings.

On Valentine’s Day 2013, IDS Real Estate Group paid $56 million for three buildings totaling 285,713 square feet in the Cabrillo Technology Center in Kearny Mesa. According to the CoStar Group (Nasdaq: CSGP), a roughly 45,000-square-foot office building was part of what was otherwise an industrial sale.

Another Valentine’s Day sale was Dimension One Spa’s $10.14 million acquisition of a 124,059-square-foot industrial building at 2611 Business Park Drive in Vista.

The next largest sale listed by CT was Southwestern Furniture of Wisconsin’s $6.25 million acquisition of a 115,540-square-foot industrial warehouse for an Ashley Furniture location at 7770 Miramar Road in the Miramar area.

A 118,597-square-foot lease for an industrial building in the Oak Park Center in Vista was listed as the top lease by CT. The lessee is Dr. Bronner’s Magic Soap, a North County firm that says it has been making lather for the past 150 years.

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