Real Estate Development Still ‘Hot’ in South County

South County shines as the bright spot in San Diego’s industrial and residential development in what has otherwise been a sagging market.

When it comes to industrial development, Otay Mesa far outpaces the rest of the county.

“If there is a hot market in this county, it’s there,” said Alan Nevin, director of the Economic Consulting Group of Gafcon.

“You take a ride down there, it’s sort of amazing. There’s a lot going on,” Nevin said. “Leasing activity there with industrial is extremely strong and there have been several major leases signed in recent weeks, and then of course, Amazon built 3.4 million square feet last year and they recently completed another 700,000 square feet and they have acquired 20-plus acres of land for future development.”

Among the most recent industrial projects, Murphy Development Company is building the final two warehouses in its 52-acre Brown Field Technology Park.

“There’s still a lot of activity, from what we can see,” said Erin Murphy Leonhardt, marketing director of Murphy Development Company.

Otay Mesa “really has become ground zero for San Diego industrial development,” Leonhardt said.

In April, Elevation Land Company, in partnership with Crow Holdings, started development of the Otay Business Park with eight buildings – the largest industrial project in Otay Mesa with 1.8 million square feet of space and one of the largest new distribution centers in Southern California, according to Cushman & Wakefield.

“We’re lucky that we have a sufficient amount of developable industrial land in Otay,” said Linda Greenberg, a principal of Lee & Associates, who specializes in industrial property.

“We have relatively inexpensive land values. We don’t have a significant amount of biological resource issues that renders developable land undevelopable,” Greenberg said.

No Room at the Warehouse

Much of the demand for industrial space in South County is fueled by manufacturers shipping products from Mexico, who need temporary storage on the U.S. side of the border pending distribution.

“One of the things that we watch for, we’re a few months out, is the amount of northbound traffic that occurs the Friday after Thanksgiving,” Greenberg said, adding that trucks line up to enter the U.S.

“It’s quite something to see. It doesn’t end,” Greenberg said.

Mark Lewkowitz, executive vice president of Colliers, said that manufacturing activity in Tijuana is “this engine that is exploding with growth,” partly as a result of nearshoring as companies move their manufacturing from Asia to Mexico.

“It’s here and a lot of these projects that are being made in Mexico are being dropped in Otay Mesa,” Lewkowitz said.

In 2022, more industrial projects were absorbed in Otay Mesa than in the rest of San Diego County combined, Lewkowitz said, adding that 2.2 million square feet of industrial space is in the pipeline to be finished by the first quarter of 2024.

“Otay Mesa has never seen that amount of warehouse development all be delivered at once,” Lewkowitz said. “It’s definitely a record. I don’t think we’ve ever had this amount of new development all at once.”

Joe Anderson, managing director of JLL, said that warehouse space in Otay Mesa is at a premium.

“There’s very little vacancy that’s move-in ready,” Anderson said. “If you need 30,000 square feet to move into in June right now, you wouldn’t have a single project to move into.”

Anderson said that while other segments of the commercial real estate market have been hit by the economic slowdown, demand for industrial remains strong.

“Year over year, I’m almost sure there are more tenants in the market versus last year,” Anderson said. “We’re seeing good activity even though you can’t move into them for another three or four months. The outlook for Otay is positive.”

Investors Biding Their Time

On the residential side, activity has slowed in South County, as it has generally throughout San Diego County, as developers pause due to the rising interest rates. That’s not to say that residential development in South County has come even close to reaching a standstill.

Millenia, a master-planned community by Meridian Development that is almost its own little city at the eastern edge of Chula Vista, is close to finishing, said Guy Asaro, president and CEO of Meridian Development.

“We’re in the home stretch,” Asaro said.

Covering 240 acres, Millenia has been in the works since 2004 when it was first designed.

“Millenia was originally entitled for 2,983 residential units and up to 3 million square feet of non-residential,” Asaro said. “It looks like at buildout, we’ll be just shy of that number in terms of residential.”

Asaro said that about 340 residential units are left to build.

“Everything else is built or under construction,” Asaro said. “We’re finishing up the last of seven parks that we had to build. We expect that to be completed by September of this year.”

Among the projects under construction in Millenia is The Avalyn, a 528,000-square-foot residential complex with 480 units in a mix of flats and townhomes in eight buildings and 14,000 square feet of commercial space.

Built by Ryan Companies, The Avalyn was the largest apartment project in San Diego County in 2022, according to CoStar.

Six of the eight buildings have been finished with the rest expected to be finished in the summer, said Daniel Bertao, vice president of development.

“We’d love to work on another project down there. That said, it is a very challenging time right now in the economy. Our industry faces quite a bit of headwind right now,” Bertao said, adding that newly enacted or proposed regulations are making it more difficult to build throughout San Diego County.

“We’re facing an affordability crisis, yet we have local jurisdictions, they’re saying all the right things, but their actions speak otherwise,” Bertao said, citing increased impact fees and project labor agreements as examples. “They are all feel good policies. They’re all done with good intentions, but at the end of the day, they have serious consequences on new construction.”

Darcy Miramontes, managing director in the San Diego office of JLL Capital Markets specializing in multi-family projects, said that transactions are down, but interest in the multi-family market in general in San Diego County remains strong. She said that’s particularly true in Otay Mesa, Otay Ranch, Chula Vista and Imperial Beach.

Although they’re not buying and selling property because the costs of capital are so high with rising interest rates, Miramontes said that clients are keeping a keen eye on the multi-family market in South County and elsewhere, looking for advice on whether they should buy, sell, or hold onto their property.

One good sign is that vacancy rates have gone down in South County, Miramontes said.

“We still have a lot of demand in San Diego for multi-family, including South County, because we have really good fundamentals,” Miramontes added. “Investors have been pencils down over the last few months because of the turbulence in the capital market. As they look forward and target different metro areas across the South, San Diego is a high target. They’re just waiting for the opportunity and they’re waiting for capital markets to moderate. Whether it’s the fourth quarter of this year or the first quarter of next year, it’s anybody’s guess.”

Rachel Parsons, Berkadia senior managing director, said that rental demand in South County is strong.

“We are seeing a slowdown in construction starts because of the challenges of financing and sourcing equity in today’s environment,” Parsons said, but she said that she expects the market to have a steady amount of activity moving forward.

“There’s a lot of capital that wants to be in Otay Ranch,” Parsons said. “I think that market is going to continue to outperform all of South County and remain the jewel of Southern San Diego.”

A major player in Otay Ranch is HomeFed Communities, which continues to develop its Cota Vera master-planned community.

HomeFed President Kent Aden said sales have been brisk.

“There just isn’t this kind of large scale, quality master plan development going on in other parts of the county,” Aden said. “The old supply and demand thing has kept our sales steady and our volume steady.”

A low inventory of resale homes has helped.

“We thought we would have more of a backlash from interest rates going up and so forth, but that lack of inventory has really offset that pressure,” Aden said. “I think buyers are finally recognizing that 6% mortgages are here to stay for a while and acquiescing to that and there’s such a shortage in San Diego for new housing and that South County represents the most home value for their dollar.”