MARKET DRIVERS
The vacancy rate in San Diego’s industrial market has experienced a significant shift, nearly doubling year-over-year (YOY) to reach 6.6% in 1Q24. This uptick in vacancy rate is largely attributed to a persistent trend of negative direct net absorption since the start of 2023. That said, the increase in vacancy has slowed quarter-over-quarter (QOQ) increasing by only 90 bps.
Transaction volume in leasing continues to trail the 5-year quarterly average of approximately 3M SF, posting 1.9M SF in total leasing activity in 1Q24. Sublease availability fell 10 bps QOQ from a record high 1.9% in 4Q23— matching similar rates not seen since mid-2010. That said, demand for small-bay properties (Sub 50k SF) remains robust, suggesting continued resilience in certain segments of the market.
Demand for industrial space throughout the region surged following the onset of the pandemic, leading to record low vacancy and availability rates. Overall market activity has begun to normalize as the current 6.6% vacancy rate is below the pre-pandemic 10-year average of 7.2%.
Although reticent lenders, high interest rates, and general economic slowdown continue to depress the investment market, activity has slowly ramped up from a multi-year low in transaction volume in mid-2023. This quarter posted $480M in transactional volume, the highest figure since 1Q23, though notably lower than every quarterly figure proceeding back through 1Q21.
ECONOMIC REVIEW
The unemployment rate in San Diego County was 4.7% in February, above the 3.7% estimate from a year ago and steady month-over-month. The county added 6,000 jobs between January and February in total nonfarm employment. This compares with an unadjusted unemployment rate of 5.6% throughout the state and 4.2% for the nation in the same time period.
Professional and business services led all industries with an addition of 3,100 jobs, bouncing back from the previous month’s decline of 3,600 jobs. Year-over-year, Private education and health services led all sectors adding 15,000 jobs. Job gains were reported across every health care subsector.
NEAR-TERM OUTLOOK
Moderation in the San Diego industrial market is expected to continue in 2024 due to high interest rates, economic uncertainty, and softening market dynamics. Though the growth in availability rates has slowed, a significant and consistent pipeline of deliveries are scheduled to come online in 2024, primarily in the South County Areas of Otay Mesa and Chula Vista, which will continue to saturate the market and slow rent growth.
Following two quarters of recovering investment activity, consistency in a new higher interest rate environment will cause investment activity to stabilize near pre-pandemic levels.
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