When one thinks of San Diego, one normally doesn't think of it as a manufacturing or industrial hub. Let's get real. We're not Akron. We're better known for our panda-producing industry. (Which has been slipping …)
Certainly, we have a significant biotech cluster — and a burgeoning craft beer industry — but traditional manufacturing, as of late, is limping along. Employment grew at just 1.5 percent last year, according to the San Diego Regional Economic Development Corporation.
So it might be surprising to learn that the county is seeing an unprecedented rise in demand for industrial space. Indeed, in the first quarter of this year, San Diego County saw the most industrial and research and development net absorption in the past 15 years, according to a recent report by Colliers International.
That's right. That even predates the recession, the normal benchmark when it comes to milestone rebounds.
“We're on fire right now,” said Evan McDonald, vice president at Colliers. “It's an extremely healthy market.”
Well, it's certainly not because of any spike in manufacturing. While manufacturing employment has been increasing since the recession in 2009, it hasn't been doing so at a rapid pace, said Kelly Cunningham, an economist with the National University System Institute for Public Policy.
“I would not say it has been all that much and still far from recovery to pre-recession levels,” he said.
Our high in manufacturing jobs was in 1989, before the collapse of the aerospace industry. Then, San Diego had 130,000 manufacturing jobs. It peaked again in the late 1990s with electronics and computer manufacturing. Then the dotcom bubble hit, Cunningham said. Today, we remain below 100,000 manufacturing jobs.
The demand for industrial space is likely because we have not been creating all that much additional industrial sites, Cunningham said.
“Even with small job growth and business expansion, there is little space or property available to accommodate it,” he said.
That's true, McDonald said. Space in central San Diego submarkets — such as Kearny Mesa and Miramar — is particularly limited. Companies like to be in areas where freeway access is plentiful. However, even outlying submarkets, such as Otay Mesa and Carlsbad, are seeing single-digit vacancy rates. That's the first time in recorded history, the report said.
Just three years ago, the vacancy rate in Otay Mesa was as high as 22.5 percent. However, improvements are coming to the San Ysido border crossing, making the area more attractive. The cross-border airport terminal is yet another plum. Businesses located there can easily serve the thriving Tijuana manufacturing base.
In April, about 700,000 square feet of Otay Mesa industrial properties was sold for $45.2 million. One broker applauded the move, noting how vacancy rates were going down in the area.
Businesses had been moving cautiously since the recession, said Chris Roth, vice president at Lee & Associates – North San Diego County, a commercial real estate firm.
“They were waiting to see what would happen,” he said. Now that the economy is showing signs of recovery, they're ramping up and looking for space.
“But there's not a lot of product available to buy or lease,” he said.
Experts believe that supply could dwindle even further. “If demand continues to be nearly robust as it has been, then we can expect countywide vacancies to be down to nearly 5 percent by year's end,” the Colliers report said.
This, of course, has been driving prices up. The 2015 first quarter saw industrial rates increase $0.02 to .99 cents per square foot, according to a recent report by CBRE, a leading real estate services firm.
“Over the last three years, since Q2 2012, the asking rate has increased by more than 25 percent,” the report said.
The report also noted how the net absorption rate has now gone up for 11 consecutive quarters.
While manufacturing hiring has been only so-so, employment in the professional, scientific and technical services grew at a brisk 7.2 percent in the last year, according to the EDC. Biotechnology, biomedical and cleantech are among the businesses in that sector.
According to Colliers, the submarket of Campus Point/Eastgate, just last year, was the one with the worst industrial demand in the county. However, three biotech companies have since moved into the market, helping to negate the poor performance, the report noted.
But that doesn't explain the pinch in the industrial market countywide, experts say.
Biotech firms tend to cluster within the Torrey Pines, UTC, Sorrento Mesa and Sorrento Valley submarkets, according to Grant Schoneman, vice president, Life Sciences Group, at JLL, a commercial real estate services firm.
Those areas are where space is built-out for life science/wet lab use, he said. Yes, that space can be created in a traditional industrial building, but the interior space improvements are significantly more expensive than typical industrial space improvements, he said.
R&D does have a tendency to take on industrial space, which has supplanted the weak manufacturing growth, noted the CBRE report. It expects industrial employment to grow by just 0.2 percent annually over the next five years.
“This low growth is relative because San Diego is not a typical manufacturing and distribution hub but has many companies occupying industrial space which are focused on R&D,” the report said.
Jobs in both manufacturing and life sciences are desirable, Cunningham said. Manufacturing jobs pay an average of $78,5000, considerably higher than San Diego's average of $53,800. Life sciences jobs pay an average of $103,000, 92 percent more than average.
Because of these trends, there's been an uptick in construction. According to the CBRE report, a number of projects are ongoing, including a FedEx warehouse in Oceanside. Experts doubt, though, it will be enough to handle the growing demand.
“Time to start building,” said Roth, of Lee & Associates.