With very limited new industrial development completed over the past several years, there is a shortage of high-quality buildings. Furthermore, of the relatively small amount of new construction that has been delivered, much of it has been build-to-suit, preleased or was absorbed very quickly. Therefore, now is an opportune time to develop Class A industrial product in these high occupancy submarkets. The industrial vacancy rates in the Subjects’ submarkets, according to Colliers International, are 7.1% in Carlsbad, 3.4% in Vista, and 1.9% in Escondido. CoStar and CBRE report nearly identical numbers; however, CBRE distinguishes different types of industrial space (i.e. R&D, light industrial and warehouse). CBRE reports Carlsbad’s light industrial vacancy at 5.6%. The North San Diego County industrial market, which includes the Subjects’ markets along with Oceanside and San Marcos, has an overall vacancy rate of 3.8%. When eliminating the functionally obsolete space (low clear heights, low ratio of dock-high and grade-level loading doors, older and poor-quality buildings) from the vacant inventory, the effective vacancy rate is substantially lower, particularly in Carlsbad.
- The greater San Diego industrial market reported the lowest occupancy in 18 years at 4.5% according to CBRE and 4.8% according to Colliers, as of 2Q 2016. Absorption in 2015 was 4.1 million sf. According to CBRE, the North County industrial market has an overall vacancy rate of 3.8%. The Subjects’ submarkets have light industrial vacancy rates of 5.6% in Carlsbad, 2.1% in Vista and 1.6% in Escondido.
- REIS, CoStar, CBRE, and Colliers indicate that the recent trends of decreasing vacancy, increasing rents, and limited concessions are expected to continue.
- The Subject properties are situated in very strong submarkets with high occupancy rates, excellent access to major roadways and freeway, considerable demand drivers, and close proximity to amenities such as restaurants and hotels.
- The Subject buildings possess state-of-the-art building design; are attractive, functional and offer efficient layouts; provide grade-level and dock-high loading doors, 26’ clear height, and high-quality office finishes.
- Experienced Sponsor, contractor, architects, and leasing team. The Sponsor and contractor have experience building is the Subjects’ submarkets.
- Land cost is below market and land supply is constrained.
- The Subject markets are experiencing a significant shortage of high-quality spacee.
Although these are spec buildings these submarkets are very healthy and tenant demand for new, high-quality, buildings is expected to remain significant beyond the time they are stabilized. The leasing brokers and Sponsor expect that a portion of the Subjects’ space will be pre-leased. In addition to tight markets and strong tenant demand, other mitigants include excellent quality buildings/locations and experienced Sponsor and leasing team.
Real estate fundamentals improve with increases in employment demands. The consensus forecast for California is that both jobs and income will continue to outperform the U.S. The central underlying economic forces driving the demand for industrial space in California are manufacturing, the export of goods to Asia and Mexico, U.S. importation of consumer goods from the manufacturing centers of Asia transiting through California’s ports, and of increasing importance, e-commerce. Given the extremely low vacancy rates at present and scarcity of land the building boom should continue through at least 2019.
Why North County San Diego?
“The northern sector of San Diego County is truly blessed with opportunities for profitable long-term development because of its highly favorable demographics, strong commercial space market and a perpetual shortage of shovel-ready land. As lands in the southern part of the sector in UTC and Carmel Valley are essentially built out and very expensive, it is inevitable that those growth industries seeking space for newly created ventures and/or expansion of existing companies will focus on new space developed in the greater Highway 78 corridor.”