WESTERN SNAPSHOT, MARCH 2010

San Diego Industrial Market

San Diego industrial development has been halted due to high vacancy rates and impossible financing. Leasing in first quarter 2010 has picked up do to some pent-up demand from 2009, which was one of the worst years ever in San Diego real estate. An investor that purchased a property in 2007-2009 is probably in the red unless he/she made one of the best purchases of the year. Real estate investment companies that held off deploying capital and strategically waited out the peak of the market are going to see very good deals in 2010, 2011 and beyond. Good leverage and the ability to get credit are a thing of the past; today cash is king.

Vacancy is around 11 percent in San Diego County, but some submarkets are as high as 18 percent. Rental rates are lower than they’ve been in years, and it is a great time to be a tenant and lock up a long-term lease. Rent concessions such as 4 free months and moving expenses for a 5-year deal are out there. Never before have so many properties in prominent areas like Carlsbad been available in the $0.60 per square foot range. Also, there are very large broker bonuses in the market — up to $2 per square foot on deals — which is a way for the owner to distinguish their property from the 30 others that look just like it.

More RFPs are being put out from tenants wondering if they can get a better deal than what they have currently — i.e., tenants looking for the same-sized building. Although times are tough for owners of real estate, C.J. Stos, a principal at ARK Management maintains that there are still some record-breaking leases being made. Stos cited two lease rates his company inked in the last 2 months that were 15 percent above any previously recorded lease comp in the submarket.

According to CoStar, only one industrial building is under construction in all of San Diego — Wilco Investments’ 120,000-square-foot state-of-the-art, LEED-certified project at 2633 Progress Street in Vista, California. Currently, there are only four buildings that can accommodate a tenant exceeding 100,000 square feet in all of North County.

Well-capitalized investors such as Rexford Industrial and SR Investments are starting to seek out value-add and core acquisition deals that will likely be great plays in the long term. Since January, there have only been a few sales, and the largest was the late January sale of three industrial properties in San Diego totaling 275,640 square feet for a price of $17 million or $61.67 per square foot.

The view here is that the first two quarters of the year will be very active with the pent-up demand of 2009 and the banks being more realistic about properties that they have had to take back. They are starting to discount the properties 30 to 40 percent from what they were selling for a year ago. With that said, the latter part of the year should slow down because of the high unemployment and owner-users, feeling they are too under water, that walk away from their properties because they can lease them for half the price of their mortgage.

Adam Robinson is a principal at Lee & Associates in north San Diego County.

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