Despite rising vacancies and availabilities in San Diego’s industrial market throughout 2023, new data indicates a stable long-term outlook.
Industrial vacancies climbed to 4.6% in Q1 2024, marking a rise for the eighth consecutive quarter, while net absorption remained negative for the seventh consecutive quarter at –354k SF. The news isn’t all bad though; leasing activity markedly increased by 33%, surging from 1.5M SF in Q4 2023 to 2M SF in Q1 2024. In the first quarter of the year, four lease deals were signed for more than 100k SF of space, three of which were new leases. Prior to Q1 2024, the last 100k SF lease deal in San Diego was signed back in May of 2023, before the market considerably slowed.
Complimentary to increased leasing activity, rent growth appears to be on the mend as well. Low-finish properties have been a key contributor to market stability as monthly asking rents grew 2.5% YoY to $1.40 PSF in the year’s first quarter. This represents a strengthening leasing market, due in part to private owners adjusting expectations of their own property rental rates. Even with ongoing negative net absorption, asking rates in four-out-of-five San Diego industrial submarkets saw growth through the first part of this year.
In addition to positive demand indicators, new supply remains nominal. The industrial construction pipeline of 2,300,000 SF in Q1 2024 is considerably reduced from the historic peak of 6,000,000 SF in Q1 2024. This development taper could improve market fundamentals in the long-term as most industrial submarkets in San Diego lack the necessary land for significant supply growth. Because of this, new construction will likely remain curbed and supply-side pressure projects to be mitigated.
While vacancies may continue to tick up, a lack of new supply combined with positively-trending demand indicators signal that the San Diego industrial market will remain stable over the long-term.
Original Publication Credit: Globe Street
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