MARKET DRIVERS
The San Diego industrial market experienced negative 719.9K SF of direct net absorption in 2Q25, which is significantly more than the negative 324.2K SF in 2Q24. This is the 10th consecutive quarter of negative net absorption. Cumulatively, direct net absorption reached negative 1.2M SF this year, only 62K SF less than this point last year.
The total vacancy rate continues to reach new heights, a year-over-year (YOY) increase of 270 basis points (bps) brought it to 9.5%. Likewise, quarter-over-quarter (QOQ) vacancy
grew by 100 bps.
Lease transaction volume decreased YOY and QOQ, recording 2.0M SF on the quarter. Despite this slight decrease, cumulative transaction volume is nearly identical to this point last year.
Industrial sales volume also saw a decrease QOQ and YOY. Unlike lease volume, sales are down cumulatively 24.7%. Although sales volume has slowed, it is still early in the year, and the lower interest rates as well as increased demand for warehouse space as tariffs are implemented are signs that industrial can turn around in the second half of 2025.
ECONOMIC REVIEW
The unemployment rate in San Diego County was 4.0 percent in May 2025, 40 bps lower than in February 2024, and 40 bps above last year. Similarly, California reported a 5.4% rate,
10 bps lower than last quarter and 10 bps higher than last year.
The San Diego-Carlsbad-San Marcos Metropolitan Statistical Area (MSA) industrial jobs saw slight decreases over the past quarter and year. The Manufacturing sector reported 109.1K jobs, marking a 3.4% decrease YOY, and a 0.5% decrease since 1Q25. The Transportation and Utilities sector is down 0.2% YOY and 0.5% QOQ to 220.0K jobs.
NEAR-TERM OUTLOOK
No new construction has been completed this quarter, and there is only 1.3M SF remaining in the construction pipeline, all of which is concentrated in North and South County. Supply constraints and growing demand are reshaping industrial market dynamics. On the supply side, elevated construction costs, driven by tariffs and volatile material pricing, particularly for steel and aluminum, continue to challenge developers. In response, many are adjusting their strategies through bulk purchasing and contingency planning, while general contractors are recalibrating cost projections amid unpredictable input costs.
At the same time, demand is intensifying as global fragmentation drives occupiers to duplicate infrastructure and build redundancy into their supply chains. According to Prologis executives, this trend is leading to increased leasing activity across key logistics markets as companies seek to secure space closer to end users and diversify regional operations. Together, these factors are tightening market fundamentals and placing upward pressure on industrial space competition.
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