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Thursday, Mar 28, 2024
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Defense Firms Make Moves in Industrial Space

Expansions by defense contractors are helping chip away at stubbornly high industrial vacancy rates in San Diego County, with purchases and leasings completed or put in motion in the past year by firms including General Atomics, Northrop Grumman, BAE Systems and SAIC.

In fact, according to CoStar Group, the largest industrial building purchases of the third quarter were led by General Atomics’ $22.2 million dollar acquisition of a 206,000-square-foot Poway warehouse building.

Elsewhere, observers note that companies are steadily taking on additional research and development space geared to high-tech manufacturing, especially in central San Diego submarkets. Segments including biotech, telecom and information technology are helping counteract the continued drag on demand for industrial space created by the beleaguered construction industry.

‘Getting Brighter’

“Rents are actually starting to flatten out in submarkets; they’re not dropping anymore,” said Bryce Aberg, an industrial broker with Cassidy Turley BRE Commercial in San Diego. “We’re not there yet in terms of a full recovery, but things are definitely getting brighter.”

Cassidy Turley’s third quarter report notes that San Diego County’s total vacancy rate, with subleasable space factored in, was 11.7 percent, down from 12.2 percent a year ago. The third quarter vacancy rate was still 2.9 percentage points higher than the 8.8 percent seen just before the start of the recession in late 2007, but lower than the peak high of 12.7 percent seen at the end of 2009.

Aberg said the core seven industrial submarkets of central San Diego, home to most of the region’s defense, biotech and telecom firms, by themselves registered a total of more than 360,000 square feet of positive net absorption — in other words, more space being occupied than vacated — with vacancy rates in some regions falling into the single digits.

Bill Dolan, first vice president in the San Diego office of CB Richard Ellis, noted the region has not fully shaken off the effects of the slumping construction industry, which traditionally accounts for about 30 percent of industrial space usage in San Diego County.

Positive Net Absorption

Local construction employment is still down 40 percent from pre-recession levels, meaning demand for building-related manufacturing space hasn’t recovered. However, enough local firms are getting work on military and other government projects that the overall region year-to-date is seeing positive net absorption, following more than two years of negative absorption prompted largely by construction layoffs.

“The downsizing isn’t necessarily over, but we’ve seen the worst of it,” Dolan said.

Mickey Morera, senior director in the San Diego office of brokerage firm Cushman & Wakefield, said while defense-related firms generally are concerned about federal budget cuts, much of the local work being done by contractors is geared toward development of unmanned aerial vehicles (UAVs) — the drone aircraft increasingly being deployed by the military in place of troops overseas.

“The development of UAVs is probably going to stay strong here for a while,” Morera said, adding that demand for defense-related industrial space will likely hold steady.

For instance, BAE earlier this year leased about 33,000 square feet of additional space in the Miramar submarket, and Northrop Grumman and SAIC have also recently been scouting sites for expansions in places such as Miramar, Poway and Rancho Bernardo.

According to CoStar Group, the warehouse building on 10 acres in Poway was purchased in July by Sorrento West Properties Inc., the local real estate holding company for General Atomics, in an all-cash transaction. The buyer acquired the property as an expansion of its existing facilities in the area, and was expected to occupy the building before year’s end after completing some renovations.

Other large purchases of the third quarter included Irvine-based Bixby Land Co.’s purchase of a warehouse in the Pacific Beach/Rose Canyon submarket for $7.3 million; and locally based John Lenore & Co.’s purchase of a central San Diego industrial manufacturing building for $5 million.

Cassidy Turley noted that large new leasing transactions of the third quarter included Andrea Shoes expanding by 90,897 square feet at a distribution center in Otay Mesa; and Skivia Graphics taking 53,717 square feet in Otay Mesa.

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