MARKET DRIVERS
The San Diego industrial market experienced positive 98k SF of direct net absorption in 3Q24, ending a streak of six consecutive quarters of negative direct net absorption. However, year-to-date (YTD) direct net absorption remains at negative 1.0 M SF, indicating that the region has faced a period of moderate demand.
Total vacancy has reached a new ten-year high of 7.3%, increasing year-over-year (YOY) by 230 basis points (bps). Quarter-over quarter (QOQ) vacancy grew by 40 bps. Lease transaction volume remained relatively steady both YOY and QOQ totaling 2.3M SF on the quarter. YTD leasing volume totals 6.97 M SF, slightly trailing the 7.05 M SF reported through the first three quarters of 2023. Despite recent challenges, the industrial market for properties under 50k SF remains resilient with a low vacancy rate of 4.6% and accounts for over 1.2M SF of the quarter’s total leasing activity.
Industrial sales volume (SF) fell by 39.8% QOQ, resulting in only 928k SF of properties trading hands. On a dollar-basis, sales volume fell 58.4% QOQ to $187.4 M. However, as a result of the expected steady decline of long-term interest rates, there has been an uptick in prospective investment sales activity.
ECONOMIC REVIEW
In Mid-September, the Federal Reserve cut interest rates as inflation has shown signs of moderation. Forecasts point to further potential rate cuts before year’s end. The unemployment rate throughout San Diego County was 5.0% in August 2024, 60 bps higher than the year-ago estimate of 4.4%. California reported an unadjusted unemployment rate of 5.9% in the same period.
NEAR-TERM OUTLOOK
Over 1M SF of new construction, concentrated primarily in south county, is slated to be delivered in 4Q, further straining vacancy in that area and limiting rent growth in the near term.
Industrial demand may be starting to recover, as there has been an increase in tenant leasing requirements compared to the first half of 2024. This new prospective demand will likely have a positive impact on leasing volume over the next 3-6 months. It remains to be seen how the recent interest rate cut will affect the region in the short-term. Further interest rate cuts may signal relief and are likely to generate new investment activity as we move into 2025.
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