2021 YEAR IN REVIEW

The year 2021 saw a substantial amount of activity in San Diego’s industrial sector for both owner user and investment property acquisitions. Pent up demand from the initial lull in activity caused by the onset Covid-19 crisis in 2020 was a major driver in a flurry of activity. In the owner / user segment a series of government subsidies helped to propel more companies to purchase properties rather than continue leasing and in turn has pushed the prices up to new record highs with 2021 Q3 bolstering $931 million invested in San Diego industrial RE based upon CoStar Group Inc. data. As this wave of buyers passed through the market in the first three quarters of 2021 it wiped out most of the supply of vacant inventory on the market for sale, the vacancy rate sits at around 3.8% for the industrial market in San Diego. This left many tenants who may have looked to be potential buyers in a position where they are being forced to renew leases or look to expand their footprint in a leasing capacity, in the San Diego Industrial market the YOY rent growth was recorded at an impressive 8.1%. This has continued to tighten the leasing market and push rents upward to record highs. The Southern California market as a whole is seeing a record number of sale leasebacks. L.A. county has been a prime example of this with 20 industrial sale-leasebacks occurring in 2021 worth close to $640 million according to data from CoStar Group Inc. This raises the question: Is there distress in companies’ financials? Businesses looking to create liquidity through exiting real property may be a signal that new owners may not have the luxury of leasing back their assets. This may also be an indicator of more vacant owner user properties coming available in successive quarters.

Activity in the investment sales sector has also seen growth as well as a strong escalation in pricing due to a combination of owner user price appreciation and a high leverage low interest rate debt market. In the private capital sector, there has been a flock of buyers transitioning out of lower yielding multi-family assets and high risk office / retail assets that pose questions on long term stability. At an institutional level there has been a historically high level of activity with numerous record low cap rates achieved in the industrial sector. This is in part due to lender appetite towards multi-tenant industrial and larger net leased last mile warehousing and distribution-oriented properties. A recent question amongst investors evaluating purchases is how the new tax basis will negatively affect future net operating income should base rent growth begin to slow down. Even if interest rates begin to tick up in 2022 it is unclear whether there will be a slowing of investment activity in the industrial sector due to how competitive the investment sales bidding process has been across the spectrum of all deal sizes in 2021. Currently there are major players with significant capital to deploy who are not being awarded San Diego’s more highly contested deals.

“With the uncertainty of this current environment, CRE remains a solid investment to hedge against the level of inflation our country is facing. As the Fed tapers off their buying of bonds it will increase investment debt interest rates because they are typically based upon the 10-year treasuries. Opinions vary across the board but as an investor it is important to be aware of the aggregate economic environment.”

For more insights on the industrial real estate space please contact us.