MARKET DRIVERS
The San Diego industrial market experienced negative 703.4K SF of direct net absorption in 1Q25, which is slightly better than the negative 843.4K SF in in 1Q24. Cumulatively, direct net absorption reached negative 1.2M SF last year, with only one quarter being positive.
Total vacancy continues to reach new heights, measuring at 8.3%, a year-over-year (YOY) increase of 190 basis points (bps). Likewise, quarter-over-quarter (QOQ) vacancy grew by 70 bps. Lease transaction volume increased YOY and QOQ, reaching 2.3M SF on the quarter. This 13.1% increase from 1Q24 puts the industrial market well on pace to match last year’s transaction totals.
Conversely, Industrial sales volume saw a 43.3% decrease from last year. Although the volume halved QOQ, resulting in only 1.0M SF of properties trading hands, on a price per SF basis, these deals were 3.6% higher. This quarter was not strong for sales, but there were lower quarters recorded in the past 2 years, and it is not a strong outlier that should cause concern.
ECONOMIC REVIEW
The unemployment rate in San Diego County was 4.4% in February 2025, 20 bps lower than in October 2024, and 10 bps above last year. Similarly, California reported a 5.4% rate, 10 bps lower than last quarter and 30 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 110.0K jobs, marking a 2.9% decrease YOY, and a 1.0% decrease since 4Q24. The Transportation and Warehouse sector is down 0.3% YOY and 3.1% QOQ to 221.2K jobs.
NEAR-TERM OUTLOOK
With 708.7K SF of construction already completed this quarter, there is only 1.3M SF remaining in the construction pipeline, a majority of both are concentrated in the already strained South County which could further vacancy and rent growth problems in the near term.
Market direction remains uncertain as several proposed policies, ranging from tariffs and corporate tax reductions to deregulation, have yet to be enacted. Without clarity on which measures will take effect, it is challenging to assess their full impact. Once these policy decisions are finalized, market participants will be better positioned to evaluate their implications and respond with greater confidence. The largest sale of the quarter, 237 Via Vera Cruz, was sold in part because it was a vacant property, but the largest driver was a change in the zoning, indicating that it will be a redevelopment play.
This property changed from a C-Commercial zone to a M-Industrial zone, allowing for more flexibility for industrial uses, especially heavy industrial. It’s not clear what the plans are for the property yet, but its encouraging to see that even in San Marcos, which is not a notoriously strong submarket for industrial, is still seeing investments being made to expand industrial in the area.
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