A sampling of submarket data shows space tightening amid rising demand in North County.
Carlsbad: 7.1 percent
Escondido: 3.6 percent
Oceanside: 4.1 percent
San Marcos: 5.4 percent
Vista: 3 percent
Kearny Mesa: 3.4 percent
Miramar: 4.5 percent
Otay Mesa: 8.5 percent
North County Total: 4.9 percent
Central San Diego Total: 5.1 percent
South County Total: 5.7 percent
San Diego County Total: 5.1 percent
Source: Cushman & Wakefield
A few years ago, when he led a local software company and was scouting North County for prospective industrial sites for his research-and-development efforts, Ben Badiee was able to find just four appropriate locations in the city of Escondido.
Now, as the CEO of La Jolla-based Badiee Development Inc., which he started in 2003, he and his work colleagues are taking on the job of changing those Escondido space dynamics on their own, with significant new speculative projects in the works.
In late October, Badiee unveiled plans to develop a three-building, $16 million industrial campus called Escondido Innovation Park, with construction set to begin in the first quarter of 2017. That announcement came just a few weeks after Badiee said his company planned to build a two-building, $13.5 million project on a nearby site, called Escondido Victory Industrial Park, breaking ground by the end of this year.
Badiee is also planning to break ground in the first quarter of 2017 on a two-building, $21 million speculative “flex” campus, combining office and industrial elements, in Carlsbad, to be called Carlsbad Oaks Innovation Park. His company is currently at work on Carlsbad Victory Industrial Park, with the first building set for a summer 2017 completion.
“The industrial asset category is definitely my favorite,” said Badiee, a nearly 30-year veteran of the commercial development industry, who recently noted that the Escondido projects will be the first ground-up industrial construction that city has seen in more than a decade.
Lack of Space in Traditional Spots
According to local commercial brokerage and research firms, Badiee and other developers planning new projects have good reasons to be bullish on North County’s industrial prospects. Escondido, Carlsbad, Oceanside, San Marcos and Vista have all seen rising demand for space amid limited new construction over the past several years.
Meanwhile, available space and developable land have nearly dried up in the traditionally most sought after industrial markets of central San Diego, such as Kearny Mesa and Miramar.
Several brokerage firms reported the North County industrial vacancy rate at a historically low 5 percent or lower at the end of 2016’s third quarter. Cushman & Wakefield reported the North County rate at 4.9 percent at the end of September, below the countywide rate of 5.1 percent.
The North County vacancy rates range from 7.1 percent in Carlsbad, down to 3.6 percent in Escondido, and 3 percent in Vista. One result is that average industrial rents in North County are up more than 5 percent from a year ago, currently at just over $1 per square foot, after seven consecutive quarters of positive absorption — more space being occupied than vacated.
Various brokerage firms report there is currently about 2 million square feet of industrial space in North County’s development pipeline, but pent-up demand in that region — based on space being scouted by companies — runs between 4.5 million and 6 million square feet.
Tenants’ Needs Vary
Brokers said companies looking to expand include those involved in technology, telecommunications, electronics, security, information technology, medical device manufacturing and defense-related products and services.
“We’re seeing that there’s going to be very robust demand for this space,” said Tucker Hohenstein, executive vice president in the Carlsbad office of brokerage firm Colliers International Group Inc., who has worked with several developers recently building in North County.
In addition to the range of companies looking to expand, Hohenstein said the type of product they’re seeking also comes in different forms. While some are scouting places to locate their corporate headquarters along with their main warehouse, others are looking for smaller spaces in multitenant campuses, while still others are seeking free-standing spaces in which to conduct light manufacturing with convenient access to local freeways.
While some companies are choosing North County to position themselves to also serve their customers in Southern California counties to the north, many others are looking primarily to cater to their existing employees and customers in the local region.
“A lot of the demand is from existing companies needing more space within the county as they get bigger,” said Adam Molnar, first vice president in the Carlsbad office of CBRE Group Inc. “That’s traditionally how San Diego County has grown.”
Local developers and brokers said that barring a significant jolt to the larger national economy, current trends are strong enough to keep industrial space deliveries flowing in North County at least through the end of 2018.
“You could see some of the planned projects drop off in 2018,” Molnar said. “The developers will be gauging the demand during 2017 and deciding whether to move ahead.”
Capitalizing on Situation
Several firms in addition to Badiee are looking to capitalize on current North County supply-and-demand dynamics. Another busy local company, RAF Pacifica Group of Encinitas, recently announced plans for a $30 million speculative industrial building in Carlsbad, called Create and expected to house a future tenant’s corporate headquarters. That comes just a few weeks after it unveiled plans for a new four-building industrial campus in San Marcos.
Along with an upcoming new Carlsbad office campus announced in early October, those fall announcements followed several other projects and property acquisition deals by RAF in the first half of the year. Led by Principals Adam Robinson and Steve Leonard, RAF alone has more than 1 million square feet of speculative industrial and office development planned over the next 24 months, much of it in North County.
Developers from outside the region are also getting into the game, with a focus on North County. For instance, Denver’s Industrial Property Trust recently acquired 13 industrial properties off Rocky Point Drive and Avenida Del Oro in Oceanside, including 10 vacant land parcels, for $16.2 million, with plans for future development.
For his part, Badiee said he has sought out locations that allow his company to come in at a relatively low cost basis, in terms of land and construction costs, in order to help his projects pencil out financially and to keep future rents competitive.
Amenities Sweeten the Pot
Tenants are currently basing location decisions on much more than costs. Increasingly, Badiee said he is planning his industrial projects to include higher-end amenities that have long been in demand in the office sector.
Those include practical elements such as high ceilings, energy-efficient designs and glassed areas that let in lots of natural light, indoor-outdoor dining and meeting spaces, and outdoor recreational amenities, all of which help companies recruit employees in a competitive market.
For now at least, Badiee said, the cost difference in most cases is minimal for a tenant choosing between locating in a new industrial space in North County, versus an older space somewhere else in San Diego County.
“I’m looking at projects that I would like to hold on to as an investment and serve tenants for generations to come,” Badiee said. “The tenants would just as soon pay $500 more a month for a building that will have what they want and that will keep their employees happy.”
