Q2 2022 Industrial Real Estate Report: San Diego, CA
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The second-largest metropolitan area in California, San Diego industrial real estate continues to expand during 2022. The demand for flex property, a hybrid of office and industrial space, is particularly active.
The city’s economy is primarily driven by military defense, tourism and bioscience. In addition, San Diego’s south border is part of the United States/Mexico border, with two main points of entry:
- the Otay Mesa port of entry for vehicles; and
- the Cross Border Xpress (CBX), an enclosed pedestrian bridge.
Before we take a closer look at San Diego’s industrial real estate during Q2 2022, let’s look at San Diego’s main economic drivers.
General Area Overview & Demographics
San Diego is home to Naval Base San Diego, the principal port of the United States Navy’s Pacific Fleet and home to over 50 of the fleet’s ships and carriers.
Visitors are attracted to the city’s historic and tourist destinations including La Jolla Coves, the San Diego Zoo, and over 90 museums. Professionals are attracted to the city’s burgeoning biotechnology/bioscience businesses.
This translates to a local economy driven by defense, tourism, and innovation.
Next, we’ll look at these drivers, and how they’re affecting San Diego’s industrial real estate performance.
Summary of San Diego Industrial Real Estate Performance in Q2 2022
Industrial real estate within San Diego continues to exceed historical demand levels.
- As of Q2 2022, industrial and flex vacancy rates stood at 1.45% and 4.96%, respectively.
- San Diego County industrial/flex properties recorded nearly 914,000 sq. ft. of positive net absorption in Q2, adding to the nearly 3 million sq. ft. of positive net absorption year-to-date.
- Fewer vacancies have contributed to average rents increasing by nearly 19% over the past year.
- When flex space is included, average rents have increased by 7%.
Flex demand has been particularly strong in life science/wet lab spaces, with office conversions creating viable options for addressing this demand.
How has Q2’s positive net absorption affected leasing prices? While industrial and flex rental rates have both increased, one is considerably ahead of the other.
How much is average San Diego industrial area real estate?
As industrial and flex vacancies continue to decline, countywide average rental rates will continue to trend up.
- In Q2 2022, the combined industrial/flex average asking rental rate countywide stood at $1.47 per sq. ft.
- The industrial average increased to $1.21 per sq. ft., and the flex average decreased to $2.10 per sq ft.
- Industrial rents in San Diego have steadily gone up by 23.5% over the past three years, while flex rates have appreciated by 6.6%.
- The combined industrial/flex rental rate has seen a 14.8% increase overall.
While the majority of transactions are leases, industrial real estate in San Diego has been setting its own sales records. And some are truly history-making.
Purchase & Leasing Activity
Following a modest first quarter, total sales volume in Q2 was the second-highest on record at $550 million.
- The average price of industrial product has risen a record 47% year-over-year to $307 per sq. ft.
- The largest Q2 completion was a 520,000 s.f. build-to-suit for an e-commerce company in the growing Otay Mesa submarket adjacent to the California/Mexico border.
Large block leasing is keeping pace with 2021 numbers, with nine industrial leases signed over 100,000 s.f. year-to-date.
- Food and beverage brand Suja Life signed a lease for 237,000 s.f. to expand within their current location in North County, representing the largest lease of the year so far.
The number of major real estate sales during Q2 has some brokers’ heads spinning, like the ones below.
Notable Industrial Real Estate Deals in San Diego in Q2 2022
Q2’s sales were highlighted by Link Logistics selling an 8-property North County portfolio at $321 per sq. ft.
Other news-making sales included:
- Murphy Development’s sale of two new warehouses to Hines in Otay Mesa for $336 per sq.ft.
- Lab developers are still acquiring Central County industrial properties ranging from $400 to $500 per sq.ft. to redevelop into biotech space.
Overall, these and other major Q2 transactions are further contributing to market-wide price increases. Let’s take a look at some new leases.
Notable Industrial Real Estate Leases in San Diego in Q2 2022
In what has been billed as one of the biggest life science leases ever for the San Diego County market, Neurocrine Biosciences has leased 535,000 square feet of space in a Carmel Valley campus that is still under construction.
The location will become the company’s new corporate headquarters.
Neurocrine signed a 13 ½-year lease on four buildings at Aperture Del Mar on Carmel Valley Road at Route 56.
The company also has an option to expand to a fifth building at Aperture to take an additional 125,000 square feet of space.
Since the area is expecting more expansions of current and future life science companies, most new developments are targeting this market.
New Industrial Real Estate Development Activity in San Diego in Q2 2022
A total of 444,041 sq. ft. of new industrial space was completed in Q2, bringing the year-to-date total to 1.62 million sq. ft.
Most of the space (91%) completed in Q2 was to provide life science/wet lab space within the North City market.
In Sorrento Mesa, a 176,910 sq. ft. building was completed that was promptly pre-leased to Element Biosciences.
Wondering what the future holds for San Diego’s industrial and flex real estate markets? Let’s look at planned new construction for the remainder of 2022.
Market Forecast for San Diego’s Industrial Real Estate Market
South County/Otay Mesa builders are planning to complete 1,654,305 sq. ft of warehouse and distribution space by the end of the year.
Currently, there are 895,000 sq.ft. of industrial product slated for completion by Q4 2022.
Combined with the absorption and rising rents seen during the first half of 2022, this data predicts one of the most active years yet for San Diego’s industrial real estate development.
Commercial land in California continues to be ripe for development in 2022 as well.
Takeaways for San Diego Industrial Real Estate Investors
While there are plenty of opportunities for fast-moving investors, competition within the San Diego industrial and flex real estate markets is particularly active this year.
The health of the San Diego industrial market remains strong, evidenced by rents which continue to set new records, rising 24% year-over-year.
Tenant requirements still outpace existing and under development availabilities by a wide margin, leaving control firmly in the hands of landlords.
Methodology
All figures presented in this article are based on MyEListing.com’s commercial real estate listing data in corroboration with other freely available data and information covering the commercial real estate industry.
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