JUNE 2025

San Diego CRE Outlook

Declining rents, rising concessions, and shifting tenant behavior are
reshaping industrial / flex leasing strategies and long-term development planning.

Industrial / Flex Market Overview

Southern California’s 2025 industrial real estate market is experiencing lease rate volatility, driven by global trade disruptions and market uncertainty.

In San Diego County, tenant priorities focus on site selection and concessions. Developers face rising construction costs and aggressive new regulation. Investors are coming to terms with softening rates and potentially higher vacancy rates.

This update focuses on key submarkets where declining rents, rising concessions, and shifting tenant behavior are reshaping both leasing strategies and long-term development planning.

Summary Recommendations

For Investors

Expect more leasing velocity in South Bay and East County industrial submarkets, but under softer rent profiles. Stability favors infill logistics sites near Otay Mesa and Miramar with cross-border capabilities. Look for value-add opportunities where concessions are peaking.

For Developers

Shorter lease terms and delayed commitments are the new norm. Flexibility in unit sizing, improved loading, and immediate occupancy options can differentiate product. Incorporate modular TI packages and design for adaptability—especially for 3PL and biotech-adjacent tenants.

For Tenants

Leverage vacancy softness to negotiate better terms. Focus site selection on transportation corridors (I-5, SR-905, I-15) and prioritize buildings offering TI support, HVAC-ready mezzanines, or cold storage potential. Month-to-month and short-term renewals are more common—and easier to negotiate.

Rate Fluctuation by Submarket

Rental rates per square foot in San Diego County are showing signs of softening across select industrial and flex-oriented markets:

  • Escondido and San Marcos: Average asking rents have pulled back, as vacancy creeps above 8%, reflecting an oversupply of space.

  • Santee, El Cajon, and Lakeside: These East County hubs are seeing rents holding steady but below historical highs due to older buildings and limited new deliveries.

  • Otay Mesa and San Ysidro: Tariff-driven demand boosting 3PL leasing potential, yet overall average rents remain on par with Mira Mesa and Kearny Mesa upper ranges—with concessions increasingly common.

What’s Driving the Shift?

Tariff Impacts & Construction Delays

Ongoing tariff uncertainty—particularly related to Chinese goods and steel imports—has slowed construction timelines and escalated costs across the region. These headwinds are curbing speculative groundbreakings and delaying tenant occupancy in new facilities. As consumer goods cycles compress, companies are under pressure to avoid overcommitting to long-term industrial leases. In response, tenants are negotiating aggressively on lease-up pricing in newly delivered properties, knowing that landlords must fill space quickly.

Regulations

California Assembly Bill 98, signed by Governor Gavin Newsom in 2024, 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. This is pushing both developers and tenants to consider adaptive reuse or look to overlooked edge markets.

Tenant Preferences

Third-Party Logistics (3PL) providers, which handle outsourced distribution, warehousing, and fulfillment for retailers, manufacturers, and e-commerce firms, have emerged as dominant tenants in South County and East County. Their demand for adaptable, well-located warehouse space, shorter-term leases, and reconfigurable space, is pushing landlords to retrofit older assets or offer lease-ready shell conditions. This tenant class is now one of the biggest drivers behind San Diego’s industrial site selection strategy.

Modular TI packages (Tenant Improvement packages) refer to pre-designed, flexible, and repeatable build-out options that landlords offer tenants when customizing a commercial space—especially flex-industrial. Rather than offering fully custom or “blank slate” improvements, modular TIs streamline the process by providing pre-approved design templates or menu-style upgrades that can be adapted based on the tenant’s needs—optional office inserts, breakrooms, or loading dock reconfigurations.

Tenants remain cautious in committing to long-term leases. Many are opting for flexible terms to hedge against future macroeconomic shifts, including inflation, interest rate volatility, and trade realignment. Submarkets with older, inflexible product are losing tenants to newer developments offering move-in-ready suites and modular fit-outs.

Industrial/Flex Market Detail (Q1 2025)

Average asking rents fell 3.8% year-over-year to $1.52 PSF + NNN in Q1 2025, down from ~$1.58 PSF in Q1 2024

County-wide base rent dropped slightly to approximately $1.63 PSF + NNN, a 7.9% annual decline

Vacancy rose to 8.3%, up 190 basis points year-over-year, and availability climbed to 11.6%

Net absorption remains negative, –703,000 SF in Q1 2025, though improved from –843,000 SF a year ago

Leasing activity is strong, 2.35 M SF leased in Q1 2025—a 13% increase year-over-year—indicating healthy tenant turnover despite headwinds.

Escondido

  • Average asking rent: ~$1.49 PSF + NNN

  • Total vacancy: ~4.4%

  • Market dynamic: Aging inventory paired with slowing leasing activity is pressuring landlords to offer TI allowances and shorter terms.

San Marcos

  • Average asking rent: ~$1.33 PSF  + NNN

  • Total vacancy: ~8.9%

  • Market dynamic: Softer fundamentals are driving landlords to compete on concessions—particularly in older Class B/C inventory.

Santee / El Cajon / Lakeside (East County)

  • Average asking rent: ~$1.45 PSF  + NNN

  • Total vacancy: ~0.9% (Santee); higher in surrounding zones

  • Market dynamic: Low new deliveries preserve rate stability, but lack of modern inventory limits upside. Flex tenants seeking higher-clearance spaces are looking westward.

Otay Mesa / San Ysidro Corridor

  • Average asking rent: ~$1.25 PSF  + NNN

  • Vacancy: ~5.4%–7.6%

  • Market dynamic: Trade exposure and access to cross-border flows attract 3PLs. However, elevated delivery pipelines are pushing rents off recent peaks, especially for older inventory near SR-905.

Takeaway: Industrial rents have softened modestly, driven by elevated vacancy and tenant churn. However, leasing activity remains elevated, suggesting replacement demand is absorbing new supply—though at lower rates.

What Comes Next?

Marketplace Fluidity: Some areas are stabilizing, but others (like Escondido and San Marcos) continue to see pressure as leasing lags new supply.

Tenant Leverage: Tenants are securing more flexible terms and improved TI allowances, particularly for space in need of modernization.

Rent Concessions: Tiered discounts are growing—especially in older Class B spaces—as landlords offer free rent periods, tenant improvement credits, and shorter lease terms to stay competitive.

Class A (New Construction)

  • Still commanding top-dollar rents in infill locations—but developers are offering 1–3 months of free rent and generous TI packages to incentivize early commitments.

  • Especially prevalent in Otay Mesa and Kearny Mesa.

Class B/C (Legacy Inventory)

  • Heavily discounted rents (~10–20% below top-market rates)

  • Landlords offering shorter lease terms (3–5 years), capped escalations, and early termination clauses.

 

Written by Aidan James