Lack of supply in the industrial market is creating constrained demand in San Diego County and is putting upward pressure on lease rates.
San Diego’s industrial vacancy rate was 5.92% for the fourth quarter, which is a little higher than it was a year ago when it was 5.75%. The lowest vacancy rate in the county can be found in the central suburban submarket, coming in at 1.97%.
The average asking triple-net lease rate per month per foot in San Diego County is currently at 74 cents a square foot, which is an increase of 5.71% when compared to 2006’s figure. The highest rates in the county can be found in the north city and North County submarkets, where the average asking triple-net lease rates are 94 cents and $1.04 per square foot, respectively. Rental rates are expected to increase 3% to 5% in 2008.
Industrial absorption registered 1.37 million square feet of net absorption during 2007, which is about half of the amount of absorption experienced in 2006. Most of the positive absorption that occurred in 2007 was in the Highway 78, Escondido (I-15) Freeway corridor, North County and north city submarkets.
Currently there is 465,221 square feet of industrial construction under way, and total construction is down just more than 70% when compared to a year ago. This slowdown is due to increasing land and construction costs.
Planned industrial construction in San Diego County is down compared to 2006. Currently there is 3.56 million square feet of industrial space planned, compared to 2006’s figure of 4.26 million square feet.
Office Market
The San Diego County office market is in a transitional phase. With vacancy rates increasing due to the completion of more than 3.8 million square feet of office construction in 2007, along with another 4 million to 5 million scheduled to be completed in 2008, some challenges exist. However, the region’s strong local economy and high quality of life continue to make it a desirable location for business.
The growing influence of industries such as biotechnology, technology and healthcare should continue to diversify the local economy and help to support further growth in the office market. These industries will increase employment opportunities and help to ease vacancy rate concerns in the coming quarters.
Unemployment in the fourth quarter in San Diego County was 4.8%, which is the same as it was when compared to the third quarter, and 0.8% higher than it was a year ago.
The Los Angeles County Economic Development Corp. is forecasting 16,900 new non-farm jobs in 2008 with another 22,600 new jobs in 2009. It is also forecasting a 4.1% gain in total personal income with inflation increasing by 2.9% for 2007.
Portfolio sales of office buildings became a trend in 2007. In first quarter 2007, Equity Office Properties Trust sold its entire portfolio of office buildings, at the time the largest portfolio in the U.S., to Blackstone Group LP. In second quarter 2007, Blackstone Group sold a small portion of them,17 office properties in La Jolla,to The Irvine Company. The total transaction to the Irvine Co. was valued at more than $1 billion and included 2.1 million square feet.
The average asking full service gross lease rate per month per foot is $2.75, which is a 5.36% increase from 2006’s fourth-quarter rate of $2.61, and is four cents higher than third quarter’s record high. Class A rates for the county are averaging $3.07 full service gross, and are the highest in the North City submarket at $3.29.
The office vacancy rate is at 12.1%, constituting an 8.4% increase over last year’s fourth quarter rate of 9.6%.
The office absorption checked in at 1.74 million square feet for 2007. This is double the amount of absorption experienced in 2006.
Currently there is 2.9 million square feet of office construction under way, and total construction is lower than it was at the end of 2006 when 4.03 million square feet was under construction. This is a decrease of almost 40% when compared to last year.
Planned office construction in San Diego County is up compared to 2006. Currently there is 10.35 million square feet of office space on the slate as being planned, compared to 2006’s figure of 9.35 million square feet.
Rental rates are expected to continue to increase at moderate levels in the immediate future. Concessions should begin to increase in the short run in the forms of limited free initial rent, reduced parking fees, relocation funds and tenant improvement allowances, as new space becomes available from construction. We should see annual lease rate growth of at least 3% to 5% continuing through 2008.
Retail Market
The retail vacancy rate is at a low 2.87%, which is down from the 3.23% rate we saw during fourth quarter 2006. One of the lowest vacancy rates in the county can be found in the North County and south/southeast corridor submarkets, coming in at 1.49% and 2.35%, respectively. This lack of supply is creating constrained demand for retail space in the San Diego County area and is putting upward pressure on lease rates.
The average asking triple-net lease rate was $2.05 per square foot per month this quarter. This is the same as last quarter and 3.76% lower than what was reported in fourth quarter 2006. The highest rates in the county can be found in the North County submarket, where the average asking triple-net lease rate is $2.79 per square foot.
Retail absorption checked in at 466,150 square feet for the fourth quarter, giving the San Diego retail market a total of more than 2 million square feet of absorption for 2007.
Currently there is 589,244 square feet of retail construction under way, and total construction is lower than the 1.15 million square feet that was under construction at this same time last year. But planned retail construction in San Diego County is up with 3.7 million square feet in the pipeline, compared with the 1.32 million square feet that was originally planned for 2007.
Rental rates are expected to continue to increase at moderate levels in the short run, and concessions will lessen as the economy in San Diego County continues to expand. These conditions will put upward pressure on lease rates going forward. We should see rental rate growth of 3% to 5% in 2008.
Analysis provided by Studley Inc.
