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Industrial Transaction Levels Drop in San Diego

Investment Volume Still Eclipsed $825 Million in the First Quarter

By Joshua Ohl CoStar Analytics April 5, 2022 | 2:28 P.M.

Although investment in the San Diego industrial market fell off the historically high level seen in the fourth quarter of 2021, when nearly $2 billion in property investment was completed in the region, it remained elevated this quarter, relative to historical averages.

Investment volume reached $825 million during the first quarter of 2022. That was only the sixth time in the past 15 years that industrial investment exceed $800 million during a single quarter. That was despite the fact that the number of sales during the first quarter was approximately 50% below the average quarterly transaction volume over the past decade.

The number of industrial and flex buildings on the market is roughly 25% below the level from one and a half years ago.

Institutional investors accounted for more than 60% of the investment volume during the first quarter of 2022.

Prior to 2021’s $4 billion sum in industrial investment, quarterly sales volume averaged only $460 million between 2016 and 2020.

The market sales price, which is based upon the estimated price of every property in a market and informed by actual transactions, eclipsed $300 per square foot at the start of the second quarter. The average price paid per square foot during the first quarter was even higher, at $427.

The market price has soared in the past 12 months, growing above 16% year over year. Among industrial markets in the United States with more than 100 million square feet of inventory, only two boast a higher market price, San Jose and Orange County.

Similarly, the market capitalization rate started the second quarter off at 5.1%, down 10 basis points in the past year. That is among the top 10 lowest capitalization rates in the country for major industrial markets.

Investors continue to target San Diego’s life sciences nodes where they can invest in older office buildings and outdated industrial facilities with the potential to convert them into high-end lab space to accommodate the region's expanding biotech tenants.

In the first quarter, the Mira Mesa and Miramar areas led the region in volume, with more than $240 million invested there. That was driven by Canada-based Oxford Property Group’s 13-building flex portfolio that sold for $464 million. The buyer acquired the portfolio, which spanned Mira Mesa, Sorrento Mesa and the Morena corridor, from BioMed Realty. That sale marked the largest foreign investment in San Diego industrial assets in the past decade.

Sorrento Mesa was again at the top of the list with more than $100 million invested in the area during the first quarter. In the past year alone, more than $1.3 billion was invested in Sorrento Mesa.

That trend is likely to continue driving sales activity and volume in San Diego. While rising interest rates may cause a rise in capitalization rates, investor demand should remain firm.

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