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Newer, Larger Industrial Facilities Are Driving San Diego Rent Growth

Otay Mesa Remains Atop the Leaderboard

By Joshua Ohl

CoStar Analytics

By now, the writing on the wall is pretty clear: San Diego’s industrial market has held up remarkably well amid the pandemic. Leasing volume has held steady, driven by logistics users and life science firms. Developers have responded, and speculative construction has accelerated. And rent growth is expected to push through the pandemic and resulting recession firmly ahead of the market's long-term average and the rate of inflation.

Rent growth in the industrial sector has not only held firm during the pandemic, but it has also, much like development, actually accelerated since the end of last summer as the region enters its second year under the weight of economic dislocation because of the coronavirus.

Annual rent growth bottomed out across the San Diego industrial market during the third quarter last year, dipping all the way to 4.1%. But the first quarter of 2021 is on target to end with rents growing above 5% year over year.

The logistics sector has led San Diego’s industrial inventory with the strongest rent growth over that stretch, with rents growing 6%. Otay Mesa, San Diego’s logistics core, stands out among the rest of San Diego’s submarkets. Rents there have grown 7.6% since last year, with logistics inventory posting 8.5% annual gains. Developers have responded by breaking ground on more than 1.7 million square feet of speculative projects in the area since last summer.

Carlsbad has also fared well amid the pandemic. Industrial rents have increased more than 5% year over year, matching the region-wide average, but logistics rents there have grown by 7.3%. Carlsbad has recorded some of San Diego’s largest new leases over the past year, with a number of biotech firms signing significant expansions in the submarket. The latest was signed by Quidel, which leased 130,000 square feet at the Carlsbad Research Center during the first quarter. Quidel signed the lease when the building was under contract to Alexandria Real Estate Equities.

Flex properties have fared reasonably well, although not quite at the level of the regional or logistics sectors average. Flex rents have grown by 4.2% in the past year, which is down about 0.5% compared to last year.

However, life science nodes filled with lab space already achieve rents that are often higher than standard office space. Effective rents above $5 per square foot on a triple-net monthly basis are common in the University of California San Diego area. Those high rents have not stifled demand, as life science firms have been among the most active lessees in San Diego over the past year, signing significant expansions for lab space fitted within flex properties.

When analyzing rents in industrial buildings by size, newer and larger facilities — those built since 2015 and larger than 100,000 square feet — have posted rent growth rates of 9.5% in the past year. Older buildings in that same size cohort have posted rent growth that matches the region’s annual rent rate for logistics inventory over the past 12 months.

Smaller industrial facilities, or those under 50,000 square feet, have recorded rent growth under 4% in the past year. Those buildings are often manufacturing facilities occupied by smaller firms. Rents have grown by just under 8% year over year among facilities in the middle tier, between 50,000 and 100,000 square feet.

The strength of rent growth in the newest and largest industrial properties speaks to the strength of demand for that inventory cohort in San Diego. The surge in e-commerce and cross-border trade with Mexico has led to an acceleration in development, and demand is anticipated to follow suit.

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