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Logistics Cos. on the Move in Otay Mesa Submarket

When it comes to rising industrial space demand in San Diego’s Otay Mesa region, some of the biggest movers are logistics companies focused on moving things around for their corporate customers.

The latest example is Atlas Freight Forwarding Inc., which recently signed a five-year lease valued at approximately $3.5 million, for nearly 100,000 square feet at the 600,000-square-foot mega-facility that formerly housed the Factory 2-U retail chain on Piper Ranch Road.

Chris Holder, a senior vice president with brokerage firm Colliers International Group Inc. who represented Atlas, said the cargo services firm has a smaller existing facility in the Otay area but needed to expand relatively quickly in order to serve the needs of an undisclosed client, a consumer products manufacturer.

Holder and other experts said this is happening with increasing frequency, sparked in part by robust manufacturing activity in Tijuana and other Mexican markets seeing rising consumer and corporate demand for products including cars, electronics, medical devices and aerospace components.

Logistics Services

The post-recession performance of domestic U.S. manufacturing, along with ascending sectors like e-commerce, have also raised local and national demand for storage, distribution and related logistics services.

Local brokers point to other logistics-related firms leasing big Otay Mesa spaces so far in 2017, including corporate relocation services provider Chipman Corp. (99,417 square feet), and On-Time Logistics Corp. (44,000 square feet).

At an Otay Mesa development owned by Denver-based Industrial Property Trust, which focuses on logistics and distribution centers, Holder noted that recent big leasings were made by customs broker JD Group, which expanded by 30,000 square feet; and kSaria, a defense contractor that took 60,000 square feet as it moved from Central San Diego to Otay Mesa.

Late last year, brokers at several firms noted that e-commerce giant Amazon Inc. “kicked the tires” on the Factory 2-U site before ultimately picking a National City location for its South County “last mile” fulfillment center (it has similar centers in Carlsbad, Point Loma and Rancho Bernardo).

Factory 2-U officially vacated the Otay property — built in 2003 and still among the San Diego region’s largest single-building industrial sites — in mid-2016. Last fall, as the building was subdivided to house multiple tenants, Balboa Water Group — which makes and distributes bath, spa and related technologies — leased nearly 100,000 square feet.

After the Atlas leasing, the property still has about 400,000 square feet available. Broker Rob Hixson of CBRE Group Inc., who represents property owner Morgan Stanley Real Estate Advisors, said the volume of prospective tenant inquiries about the property is up considerably from a year ago, with interest being shown by companies in multiple sectors.

As a result, the building could be fully leased in about a year, depending on the speed at which companies showing serious interest actually decide to pull the trigger on locating there.

“Some of this also stems from the fact that things are very tight and rents are higher in Central San Diego,” said Hixson, a senior vice president at CBRE.

According to CoStar Group data, Otay Mesa is San Diego County’s second-largest industrial submarket, with nearly 15.6 million square feet of total space. It ranks behind only Miramar (18 million square feet) and slightly ahead of Kearny Mesa (15.4 million).

However, Miramar and Kearny Mesa, both in Central San Diego, each have vacancy rates around 3 percent.

Logistics providers and food distributors are among users contributing to a steady decline in the border-adjacent Otay Mesa’s industrial vacancy rates, which have slid from 23 percent in 2011 to a historically low 6 percent in 2015, according to Colliers. As of mid-2017, the rate remained relatively low at 6.7 percent, not far above the countywide rate of about 5 percent.

Combined with steady improvements to South County roadways, such as state routes 905 and 125, and a rising inventory of housing to serve future new workers, there is talk about new industrial construction moving forward in Otay Mesa, after several years of little new supply being added to the industrial inventory.

Considering New Development

“There’s more investigation going on into potential new development, but that would probably be built over the next four or five years,” Holder said.

Linda Greenberg, principal in the San Diego office of brokerage firm Lee & Associates, noted that several large older buildings including the Panasonic property on Sanyo Avenue — currently owned by San Diego’s Murphy Development Co. and partially leased by the electronics firm — are being rehabilitated and placed on the market.

The speed at which properties get leased will depend on various micro and macro-economic factors, including the course of U.S. trade policies. “There are some prospective tenants for Otay Mesa waiting on the sidelines, pending the resolution of NAFTA negotiations,” Greenberg said.

Greenberg and other observers said Otay Mesa’s land availability and lower land and rent costs, relative to other parts of the market, could make it a strong candidate for local economic development leaders to put forward in the national contest to land Amazon’s planned second headquarters outside Seattle — aka HQ2.

The Otay region can also capitalize on a strong cross-border workforce.

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