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Pricing in San Diego's Industrial Market Picks Up While Cap Rates Hold Firm

By most measures, San Diego's industrial market is red-hot. Annual rent growth ended the first quarter more than double the long-term average. Although vacancies ticked up at the end of last year, occupancies continue to hover within 100 basis points of the all-time high established last fall. And development as a percentage of inventory remains elevated after net new supply in 2018 reached a post-recession high.

But it looks like investors may be taking a deep breath in 2019. After 2018 posted an all-time high for industrial sales volume in San Diego, $1.9 billion, this year is off to a less auspicious start.

The first quarter tallied $217 million in recorded transactions, according to CoStar. That was the lowest quarterly volume in San Diego since the first quarter of 2016. The large deals that set 2018 on its record-setting pace have yet to materialize.

Only 111 transactions recorded in the first quarter of this year. That comes off two straight quarters with 154 deals and more than $1.2 billion in transaction volume. In fact, February was the only month in the past year that recorded fewer than 20 deals.

Market pricing, based on the estimated price movement of all properties in the market and informed by actual transactions that have occurred, reached its highest point on record at the end of last quarter -- $223 per square foot. That comes as market cap rates have stabilized at 5.5%, holding firm year-over-year. Indexed to 100 at the end of 2008, pricing has increased by 68% in the past decade.

Although it wasn’t the largest sale of the quarter, Longfellow Real Estate Partners from Boston picked up another asset in San Diego. The firm acquired the Torrey Sorrento Science Park in Sorrento Valley in January for $15.5 million, or $413 per square foot. That comes on the heels of Longfellow’s first market acquisition last November. It acquired a 13-building life science portfolio in Sorrento Valley for $112 million. It is part of the company’s strategy to acquire up to 2 million square feet of flex/R&D space in San Diego over the next several years.

One reason that investment may have cooled, according to local brokers and investors, is that there are fewer opportunities within mid-sized buildings. These are often targeted as value-add investments. Buyers have been scooping up office/R&D-type properties to reposition into life science use. That was the strategy employed by Longfellow. The investor intended to continue a renovation of its $112 million portfolio that the seller, Parallel Capital Partners, initiated.

Article By: CoStar

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