2022 MID-YEAR MARKET REVIEW

As we approach the mid-year point of 2022, we have seen a mixture of changes and continued trends in the San Diego industrial market. In the leasing sector, strong demand for logistics space has continued, with the most competitive space being >20k SF, dock-high product. The market has also continued its surge in rent growth, specifically in the 1,000-5,000 SF range. A lack of new supply, in large part a factor of high development costs and land scarcity, has kept vacancy rates significantly low and created significant pressure on new leases. The labor shortage has been a major issue among businesses countywide. In many cases, it has impacted their willingness to relocate due to fear of losing skilled laborers. 

In central county, landlords are capitalizing on the upside of life science and R&D conversions from traditional industrial properties. The conversion trend continues to compound the shortage of available traditional industrial supply, leading to further rent growth. Furthermore, landlords are providing minimal concessions on new leases due to the extreme demand. Our team anticipates that this steady growth will continue, until there is greater availability of functional space. We are advising landlords to "white box" their available space, allowing for TI flexibility for a wide range of users. Combined with appropriate marketing of their spaces, we strongly believe landlords can continue to achieve historically high rents and minimal downtime.

Within the investment sector, there has been new hesitation among investors who are waiting to see if/when/how the market adjusts to the rise in interest rates. During the COVID era, the amount of equity created through asset appreciation and fueled by cheap debt was historic. Investors with "dry powder" to invest have continued to prop up pricing, keeping cap rates at record lows despite the Q1 rise in interest rates. We have seen this effect continue into Q2 - specifically with exchange buyers capitalizing off record sales. Recently, we have noticed a softening of pricing expectations due to recent economic news and the continued rise in interest rates. Seller expectations are starting to readjust from the COVID era highs. We anticipate gradual cap rate expansion throughout the remainder of the year, primarily due to rising interest rates. However, we also believe that continued rent growth (due to supply/demand imbalance) will insulate values and continue to push market prices. Given the uncertain economic environment, we have encouraged clients to emphasize the creditworthiness of tenants for new leases and evaluating acquisition opportunities. Likewise, we advise that the appropriate amount of leverage to finance each deal is taken into account. 

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