San Diego CRE Outlook

CRE Outlook—Flex Leases, 3PL Surge, Tariff Disruptions & Policy Shifts

The CRE market in 2025 is defined by a balance of caution and creativity. Across the board, successful stakeholders are those who:

• Embrace flexibility in lease terms and building use

• Avoid speculative overexposure

• Seek locations that offer entitlement certainty and adaptability

• Collaborate with logistics partners to reduce operational risk

Rather than betting on long-term stability, the market now rewards those who can respond quickly to change, especially as trade policy, tenant needs, and environmental regulations remain fluid.

Summary for Investors

San Diego’s core markets are constrained by entitlement delays, construction inflation, and zoning barriers. Secondary submarkets—like East County, North County Inland, and South Bay outskirts—are increasingly attractive for their repositioning potential and lower entry cost. In 2025, industrial properties that can accommodate short-term leases and 3PL demand will generate stronger yields with less entitlement risk.

Summary for Developers

Tariffs have increased costs and timelines across the board, and AB 98 has reshaped what’s feasible in core industrial areas. Developers who focus on modular retrofits or entitlement-light sites will be best positioned. Build for flexibility: clear heights, EV access, multi-tenant layouts, and phased infrastructure. Flexibility isn’t a bonus anymore—it’s the foundation of feasibility.

Summary for Tenants

Rising rents and unstable supply chains make flexibility your best asset. Seek out landlords offering short-term lease options in East County or North County Inland, and negotiate for utility sharing or phased expansion. Partnering with 3PLs allows you to scale fast without the burden of fixed real estate. With so much in flux, your advantage lies in staying light on your feet.

Market Overview

Southern California’s 2025 commercial real estate market is defined by widespread uncertainty. In San Diego County, global trade disruptions, rising construction costs, shifting tenant demands, and aggressive new regulation are redrawing the map for leasing, development, and site selection.

Tariff Impacts: Escalating Construction Costs and Project Delays

A wave of tariffs on imported steel, glass, copper wiring, and finished mechanical systems has caused major challenges for developers and investors:

• Construction costs have increased 18–25% year-over-year, especially on tilt-up shells, structural components, and HVAC systems.

• Project timelines have lengthened by 3 to 6 months due to sourcing issues and customs delays—particularly with goods from East Asia.

• Many speculative projects have stalled or been canceled altogether as pro forma models are reappraised under more conservative capital assumptions.

Developers are increasingly avoiding high-risk entitlement zones and are turning to retrofit opportunities and overlooked sites in San Diego’s secondary markets.

Lease Structures: Flexibility as Risk Management

Economic uncertainty, inflation, and a volatile supply chain have made short-term leasing strategies more appealing than ever.

Month-to-month or rolling 90-day leases are on the rise. Tenants—especially small and mid-sized logistics operators—want the flexibility to scale up or down in real time. Meanwhile, landlords are responding by subdividing properties, sharing infrastructure, and building in floating rent escalators to stabilize returns without long-term commitments.

These flexible lease structures are especially common in non-core industrial markets and repurposed retail/industrial sites.

3PL Growth: Reshaping the Market

Third-party logistics (3PL) refers to the outsourcing of warehousing, distribution, and delivery services to a dedicated logistics provider. Rather than maintaining in-house logistics operations, companies lease space or partner with operators who specialize in fulfillment infrastructure—often at scale.

3PL operators use large, automated warehouses to store, manage, and distribute goods using advanced software, RFID tracking, and regional freight coordination. Their success depends on location, ceiling height, cross-docking capacity, and tech integration.

In 2025, 3PL operators are driving the majority of new industrial lease activity in Southern California. San Diego’s proximity to the U.S.–Mexico border and access to multiple interstate corridors make it a strategic choice for 3PL expansion.

Key drivers behind this demand:

• E-commerce volatility, which rewards warehousing capacity over retail exposure

• New tariffs and shipping disruptions, prompting many businesses to hold inventory closer to their customer base

• Congestion at L.A. and Long Beach ports, which has pushed more volume to cross-border entry points like Otay Mesa

3PL operators are now among the most desirable tenants for industrial landlords, demanding large footprints, flexible layouts, and access to labor.

Policy Pressures: AB 98 and Environmental Regulation

California Assembly Bill 98, signed by Governor Gavin Newsom, introduces strict regulations for warehouse development. Developers must now plan for:

• Setbacks of 300 to 500 feet between industrial facilities and sensitive land uses

• EV fleet infrastructure, rooftop solar readiness, and high-efficiency systems

• Community benefit agreements or mitigation plans for certain project types

As a result, large-scale industrial entitlement has slowed dramatically in key markets like Otay Mesa, Miramar, and the Inland Empire. This is pushing both developers and tenants to consider adaptive reuse or look to overlooked edge markets.

Site Selection Strategy: Secondary Markets Take the Lead

With cost pressures, environmental mandates, and land scarcity in core areas, site selection has shifted to San Diego County’s secondary commercial real estate markets. These areas offer lower land prices, reduced entitlement friction, and strong access to regional logistics routes.

East County (El Cajon, Santee, Lakeside)

• Strengths: Lower lease rates, industrial-friendly zoning

• Challenges: Aging infrastructure, limited ceiling heights

• Best for: Flex industrial, trades, local suppliers

South Bay Non-Core (National City, Chula Vista away from border)

• Strengths: Proximity to ports and urban core

• Challenges: Strong residential competition, zoning constraints

• Best for: Last-mile warehousing, 3PL overflow

North County Inland (Escondido, Vista, San Marcos)

• Strengths: Skilled workforce, good transit access

• Challenges: Suburban pushback, rising land prices

• Best for: Biotech flex, advanced manufacturing, e-commerce support

Written by Aidan James