Expected move-outs propel a correction in fundamentals

Transcription

1 MARKETVIEW San Diego Industrial, Q Expected move-outs propel a correction in fundamentals Vacancy Rate Net Absorption Construction High-finish Lease Rate 4. (756,126) sq. ft. 2,573,110 sq. ft. $1.37 NNN Low-finish Lease Rate $0.95 NNN Figure 1: Net Absorption vs. Asking Lease Rate *Arrows indicate change from previous quarter 000's SF Rate (NNN) 2,000 $1.50 1,500 $1.25 1,000 $ $ (500) $0.50 (1,000) $0.25 Net Absorption High-Finish Rate Low-Finish Rate After a record-setting third quarter, substantial move-outs led to negative 756,126 sq. ft. of net absorption in the fourth quarter. Six new buildings delivered in Q4 adding 337,308 sq. ft. to the base, about one-third of which was pre-leased. The large volume of newly-delivered vacant space coupled with large move-outs bumped the vacancy rate 50 basis points (bps) quarter over quarter to 4.. The setback in other fundamentals did not negatively impact asking rates. The average asking rate for low-finish product increased $0.01 to $0.95 NNN and high-finish product was unchanged at $1.37 NNN. Leasing activity was dominated by life sciences, wholesalers and materials manufacturers. The San Diego industrial market closed 2018 with a slight bump in an otherwise overwhelmingly positive year. Anticipated vacancies of several large spaces led to negative 756,126 sq. ft. of net absorption in Q4, but year-to-date net absorption closed more than 1.0 million sq. ft. in the positive. Leasing activity reached 12.9 million sq. ft. for the year, exceeding the volume reached in Asking rates for both low-finish and high-finish product finished the year at all-time highs. The overall vacancy rate climbed 50 bps to 4., but the increase was driven by tenants vacating existing listings, as the availability rate decreased 20 bps to 7.3%. Industrial and lab users added 5,900 jobs (+1.) year over year, which was lower compared with the past several quarters. Construction jobs were unchanged after several quarters of consistent growth, likely a consequence of rising construction costs and trade 2019 CBRE, Inc. 1

2 policy. Manufacturers added 6,000 jobs (+5.5%), the most since Manufacturers in San Diego have not shed jobs year over year in more than seven years. Scientific R&D, a sector that includes mostly life sciences and defense companies, grew by 1,800 jobs (+5.) year over year. Job growth in this sector has corresponded with related companies signing many of the top leases in A recent CBRE Industrial & Logistics report highlighted the importance of transportation and warehousing (T&W) job growth to the future of the warehouse sector. The report noted that even with the rise in automation and productivity gains, employers will likely face challenges finding the talent to fill the demand for T&W labor, especially as e-commerce grows. In San Diego, T&W employment grew by 16.0% from , which was 90 bps higher than the average for similarly-sized U.S. hubs. That trend reversed in 2018 and local T&W employment fell by 2.5% year over year. Net absorption figures indicate that warehouse product did take a step back in Q4, accounting for negative 445,432 sq. ft. of net absorption. Despite this singlequarter setback, warehouse finished the year with nearly 1.3 million sq. ft. of positive net absorption and 1.7 million sq. ft. under construction. Slowing employment growth does not appear to have had a significant impact yet on the demand for warehouse space, but if job losses continue or accelerate, dampened demand could follow. Industrial users of nearly all product types returned space to the market in Q4. After a record-setting Q3 for positive net absorption, Q4 figures bore the latent effects of many users vacating their previous spaces for new ones. The volume of available space declined from Q3 to Q4, but vacating tenants pushed up the vacancy rate 50 bps to 4.. In addition to warehouse, R&D space was the other significantly impacted subtype in Q4 at negative 294,214 sq. ft. of net absorption, bringing the 2018 total to negative 316,812 sq. ft. High-finish asking rates did not budge from an all-time high at $1.37 NNN, even with vacancy at its highest in three years. High-quality R&D availabilities in Kearny Figure 2: Unemployment Rate SD CA U.S. Figure 4: Asking Lease Rate Rate (NNN) High-Finish Low-Finish $1.50 $1.25 $1.00 $0.75 $0.50 Source: U.S. Bureau of Labor Statistics, Q Figure 3: Year-Over-Year Job Growth Jobs (M) # Employed Y-o-Y % Change Source: U.S. Bureau of Labor Statistics, Q Y-o-Y % Figure 5: Year-Over-Year Rent Growth 20% High-Finish Low-Finish 15% 5% 0% (5%) () 3% 1% 0% 2019 CBRE, Inc. 2

3 Mesa and Rancho Bernardo drove up the average rate. Low-finish space was similarly not impacted by the loosening in the market, with rates increasing just $0.01 to $0.95 NNN. Warehouse asking rates fell $0.01 to $0.88 NNN, just below the all-time high rate set the previous quarter. More than 2.0 million sq. ft. of new warehouse product delivered in 2018, 39.7% of which delivered available, driving up the average figure. Leasing activity decreased to 2.8 million sq. ft. in Q4, far below the 4.3 million sq. ft. mark in Q3, but closer to the post-recession average of 3.3 million sq. ft. Two leases exceeded 100,000 sq. ft., which were the Tire Warehouse 106,451-sq.-ft. deal on Ruffin Rd. in Kearny Mesa and the Zodiac Pools 103,741-sq.-ft. deal on Whiptail Loop in Carlsbad. Samumed signed a 73,983-sq.-ft. lease in UTC after receiving $438 million in venture capital funding in August The company focuses on research and development for tissue-level regeneration. Sorrento Therapeutics signed a new lease on Directors Pl. in Sorrento Mesa for 61,027 sq. ft. The immunotherapy company closed a $150 million financing deal with Oaktree in November to fund expansion of several key clinical programs. First Industrial Realty Trust broke ground on 8572 Spectrum, a 22,099-sq.-ft. R&D project in Miramar. The fully-available project is a rebuild of a recently demolished light industrial building and is expected to deliver early in Six new buildings totaling 337,308 sq. ft. delivered in Q4, all of which were warehouse and about one-third pre-leased. The four buildings branded as pro.duc.tion in San Marcos delivered 74. vacant. The project was recently sold to RAF Pacifica in a large portfolio transaction. The 62,600-sq.-ft. warehouse on 9269 Lightwave Ave. in Kearny Mesa delivered vacant. The remaining delivery was a 61,000-sq.-ft. warehouse that delivered fully occupied to Coleman World Wide. Figure 6: Overall Vacancy Rate 1 Figure 8: Gross Absorption MSF Figure 9: Under Construction 000's SF 4,000 3,000 2,000 1,000 0 Figure 7: Overall Availability Rate CBRE, Inc. 3

4 Figure 10: Market Statistics Region RBA Overall Vac. % Overall Avail. % Qtr Net Absorption Under Const. Const. Deliveries Low-finish Asking Rate High-finish Asking Rate Qtr Leasing Activity Central San Diego 79,309, (270,651) 645, ,600 $1.23 $1.55 1,359,242 East County 14,811, (59,588) 17,060 - $0.94 $ ,490 North County 53,333, % 9. (212,747) 1,001, ,708 $0.90 $ ,690 South San Diego 30,964, % 5.9% (140,971) 789,228 - $0.69 $ ,076 SW Riverside 14,862, % 4. (72,169) 119,838 - $0.79 $ ,187 San Diego Totals 193,282, % (756,126) 2,573, ,308 $0.95 $1.37 2,805,685 High-Finish 34,266, % (294,214) 403, $ ,089 Bus. Park R&D 7,902, (14,370) $ ,785 R&D 26,363, % (279,844) 403, $ ,304 Low-Finish 144,655, % 6. (445,751) 1,759, ,308 $0.95-2,028,074 Bus. Park Ind. 26,214, % 4.5% 31, $ ,940 Light Ind. 68,903, % 5. (31,655) 11,952 - $ ,568 Warehouse 49,537, % (445,432) 1,747, ,308 $ ,566 Lab 14,359, (16,161) 410, ,522 Figure 11: Key Lease Transactions Occupier Industry Sector Location Product Type Sq. Ft. Leased Tire Warehouse Retail / Wholesale Kearny Mesa Warehouse 106,451 Zodiac Pools Manufacturing Carlsbad R&D 103,741 Samumed Life Sciences UTC Lab 73,983 Boral Roofing Building Materials Oceanside Warehouse 66,780 Sorrento Therapeutics Life Sciences Sorrento Mesa Lab 61,027 renewals indicated by * Figure 12: Key Sales Transactions Property Buyer Location Total Price $/Sq. Ft. RBA Sequence Dr* The Regents of Univ. of California Sorrento Mesa $154.4M $ ,153 Inspire (Sorrento Collection) Longfellow RE Partners Sorrento Valley $112.0M $ ,969 Siempre Viva IDS RE Group Otay Mesa $67.5M $ , Barnes Canyon Rd TH Real Estate/Nuveen Sorrento Mesa $43.2M $527 81,976 Vista Business Park BLT Enterprises Vista $31.2M $ ,660 *Partial-interest sale, % unknown Manulife remains in asset management/ownership position 2019 CBRE, Inc. 4

5 CONTACTS San Diego Research Department Petra Durnin Director Research & Analysis, Pacific Southwest Michael Combs San Diego Research Manager Ally Dell Senior Research Analyst CBRE SAN DIEGO OFFICES San Diego Central Office 4301 La Jolla Village Dr Suite 3000 San Diego, CA North County Office 5780 Fleet St Suite 100 Carlsbad, CA To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.