Industrial Space Attracts Tenants Amid Easing Demand

SAN DIEGO COUNTY – Demand for industrial property in San Diego County has cooled since its post-COVID peak of 2022 and 2023 with vacancy rates on the rise, yet some developers and investors still see it as a good bet.

Sudberry Properties has finished building two manufacturing warehouses with more to come in its Otay River Business Park. Hines has fully leased a new 101,145-square-foot building in its Britannia Tech Park in Otay Mesa, and Avis Budget Car Rental recently leased a 91,541-square-foot building in National City.

“We have two more buildings to build after this and we’re in the process of entitling other land we own down there,” said Colton Sudberry, president of Sudberry Properties.

“We’re going to commence building those buildings, probably early next year,” Sudberry said.

Construction also is wrapping up on a Kearny Mesa industrial building.

“The San Diego market has continued to show positive signs of green shoots with recent transactions that have been done,” said Brant Aberg, vice chairman of Cushman & Wakefield in San Diego County.

The number of industrial buildings bought and sold was down in the second quarter of 2024 compared to the same time last year, “but we’ve continued to see positive rent growth in the market,” said Aberg, who represented Hines in brokering the Britannia Business Park lease with Foxx Development and was a broker on the National City lease.

“The reason that the increase in vacancy is getting more attention right now is because all of us collectively – brokers, institutional owners, tenants – have become accustomed to these last few years of these compressed vacancy rates across the market, where we’ve experienced 1% or 2% vacancy markets, which isn’t a sustainable, realistic vacancy rate or really reflecting it healthy environment,” Aberg said.

“Now, it really feels like the market is more of a return to what I would consider normal,” Aberg said, adding that he’s seen an increase in interest among likely tenants over the summer.

“I think, overall, for the San Diego market, it’s going to end up to be a good year for the marketplace, especially when you compared it to our neighbors to the north the Inland Empire, Greater Los Angeles, that have seen rent deterioration and vacancy increase,” Aberg said.

Tenant Market

Andy Irwin, executive vice president at JLL in San Diego, said that he expects San Diego’s industrial market to be soft “for the near future,” partly because so much new product has been built.

“We’ve seen some increased demand kind of late this summer. We anticipate that to continue to grow and that will start eating away at the supply that’s been delivered and then next year, with very little supply, if any, that comes online in San Diego, we’ll see a stabilization and then move back into rent growth,” Irwin said. “Right now, we’re in a tenant-favored market and we forecast that will kind of stabilize and be moving into a landlord-favored market later next year, mid-to- later next year.”

This comes against a backdrop of cautionary reports from some commercial real estate brokerages, although they differed on the overall performance in the second quarter.

Colliers reported that the vacancy rate for industrial property it was tracking reached 6.96% in the second quarter of 2024, the third consecutive quarter that the vacancy rate exceeded 5% after staying below 5% for the previous three years.

CBRE pegged the vacancy rate among property it followed at 5.2% and JLL reported a vacancy rate of 5.8%.

From his perspective, Sudberry said that the leasing market “is fairly robust.”
“It’s not quite as robust as it had been. We’re still getting quite a few tenant tours,” Sudberry said. “We’re pretty encouraged.”