In this month’s Market Insights, we have Pat Connors, Vice President at Voit Real Estate Services, speaking with Eric Northbrook, Executive Managing Director and Partner, about what’s currently going on in the San Diego industrial warehouse sector.
Connors has been with Voit for seven years and primarily focuses on buying, leasing, and selling industrial warehouse distribution buildings down in Otay, South Bay, and out in East County.
Let’s hear what Pat has to say.
What’s Going on in the Market?
“Down in that market,” says Connors, “it’s the only place here in San Diego that has widespread development.” Picture this: Lots of land sales, big BOMA buildings going up.
“Most of these buildings,” says Connors, “are bigger than anywhere else in San Diego. “We’re starting to see big-name tenants come down into the market and absorb these 100 and 200,000-foot buildings.”
“The developers have been right and happy… Everything’s getting absorbed almost as soon as it gets built.”
Is There Any Additional Land for Development?
So, Northbrook asks, “is there any additional land for development down there?” to which Connors says hardly any.
“What’s left is primarily spoken for at this point. There are companies trying to make it further east, trying to get north of Brown Field onto some of the government lands, but for the most part, it’s spoken for.”
What Are Rates Today?
Rates are drastically different from the 200,000-square-foot distribution deal transaction Northbrook completed for 30 cents gross about 10 to 12 years ago.
Today, as far as rates go, nearly every building you see is going to have nets higher than 30 cents.
“You’re looking at about $1 to $1.15 on buildings over 50,000 feet and $1.20 to $1.30 on buildings 20,000 feet and under… Tenants are not happy and they’re being forced to pay the increased rates.”
How Has the Current Interest Rate Environment Shifted Things?
Luckily, the current interest rate environment hasn’t affected things too much, says Connors.
“There’s not a lot of mom-and-pop one-off owners anymore. Pretty much everything has switched over to institutional control in the last three to five years. So for right now, there hasn’t really been a slowdown. There are not that many buildings that haven’t traded yet.”
Predictions for the Next Year and a Half
Although we’re going to be in a crazy interest rate environment, Connors thinks lease rates will at least hold steady or just go up a little bit, especially in the smaller size ranges.
“We might have reached the point where we’ve hit the top of the rent growth market… I think some of the institutional guys can hold on; the stuff they’re building will get absorbed at those rates that they’re underwriting.”
Interested in more Market Insights? Check out “How COVID and Interest Rates Affect Retail with Bob Brady.”