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Otay’s Wealth of Industrial Vacancies Luring Buyers, Tenants

BY SYLVIA TIERSTEN

The Otay Mesa industrial market, which accounts for about one-tenth of the industrial building inventory in San Diego County, has plenty to offer right now.

Otay Mesa’s industrial vacancy rate, at 17 percent, is currently the highest in the county, according to Charles Adolphe, a director at Cushman & Wakefield Inc. in University City whose team specializes in South San Diego County commercial/industrial real estate. When the retail economy is healthy, Otay’s vacancy rate is closer to 12 percent.

Countywide, according to Cushman & Wakefield statistics, this year’s first-quarter direct vacancy rate for industrial real estate was 6.7 percent , compared with 7 percent at year-end 2007. Kearny Mesa, an industrial area with little vacant land, is at 2.4 percent.

The good news about Otay’s comparatively high vacancy rates is that “this translates into opportunity for industrial buyers and tenants seeking lower prices per square foot than elsewhere in the county,” said Adolphe. Otay has 2 million square feet of available industrial space , and the majority of these buildings are new.

“Because there’s an opportunity to build industrial space in Otay Mesa, we’ve had a lot of space built in the last two years. Now we’re a little overbuilt,” said Rob Hixson, senior vice president of CB Richard Ellis in UTC and chairman of the Otay Mesa Planning Group.

Surprisingly, said Hixson, the building continues. Newport Beach-based Master Development Corp., for example, has a proposal in the works to construct another 300,000 square feet.

Otay Mesa’s absorption rate last year was about 50 percent of average, said Hack Adams, a partner at Murphy Development Co. in Otay Mesa. Usually, annual net absorption is 600,000 to 650,000 square feet. For 2008, “there’s a strong likelihood of negative absorption,” he said. “Some of the tenants are giving space back.”


Manufacturers Seek Space

One of the few bright spots during the past couple of years is manufacturing, said Adams. Kojima America Corp., which manufactures precision components for plasma TVs, leased 103,000 square feet of space in Siempre Viva Business Park, a 155-acre industrial park being built by Murphy Development. Murphy has developed 1.8 million square feet and is currently constructing a 160,000-square-foot building for Circle Foods, a food manufacturing group, with an anticipated operational date in early 2009.

As for industrial warehousing and distribution tenants, the slowdown in consumer electronics spending, coupled with the quest for less expensive space, “are taking these companies closer to the ports of Los Angeles and Long Beach,” said Adams. Leasing rates in Otay Mesa are essentially flat and in the range of $50 to $70 per square foot, depending on product type and modifications required to meet the needs of each tenant. Comparable rates in the Inland Empire are in the $40 to $50 range per square foot.

The long-term trend is for warehousing and distribution companies to settle around the ports of Los Angeles and Long Beach, which handle cargo arriving in mega-containers from Asia, according to Adams. Meanwhile, land constraints in San Diego add up to a healthy industrial market , and one with a regional slant.

The transformation of Brown Field Municipal Airport and improved road transportation in the South County region will lure more manufacturers, as well as higher-end uses and product types, to Otay Mesa, Adams predicted. More research and development and technology companies will bring their back office and manufacturing functions to Otay, he said.

In the past, Otay was heavily dependent on maquiladora business and tenants from Mexico. With quicker and easier access to South San Diego via the state Route 125 toll road, more tenants are moving to Otay from other parts of the county, said Hixson. Among the attractions is the region’s abundant and affordable labor supply.


Sylvia Tiersten is a La Mesa-based freelance writer.

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