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North County Feels Effects of Improving Industrial Market

Improving fundamentals in San Diego County’s industrial property market are piquing the interest of locally based investors like SR Commercial, as vacancy rates in that sector continue to head downward.

The privately held investment and management firm, with headquarters in Solana Beach, recently purchased La Pacifica, a three-building multitenant industrial park in Oceanside, for $19.8 million. The seller was U.S. Rep. Darrell Issa, R-Vista, who represents California’s 49th congressional district.

Local brokers confirm that the Oceanside purchase was the largest North County industrial acquisition so far in 2013, and among the largest countywide. It also followed closely behind SR Commercial’s purchase of two other North County industrial buildings — one in Vista and one in Oceanside — for a total of $12.9 million, from other sellers.

North County industrial markets have historically lagged behind central San Diego markets — such as Kearny Mesa, Miramar and Sorrento Mesa — for overall demand among tenants and investors, and experts say Oceanside in particular is still playing catch-up.

However, prospects for both the North and South County regions have recently been rising, thanks in part to limited land and space remaining in central San Diego and still scarce construction in the local industrial sector.

Brokerage firm Cassidy Turley San Diego recently reported that San Diego County’s overall industrial vacancy fell for the seventh consecutive quarter, standing at 9.3 percent at the end of the first quarter of 2013, its lowest level since mid-2011.

In its own first-quarter report, brokerage firm CBRE deemed the segment’s performance “San Diego’s strongest start to a year for industrial properties since 2006,” with more than 700,000 square feet of net space absorption.

Increasing Rents

Cassidy Turley Senior Vice President Bryce Aberg said industrial rents have increased 10 to 15 percent from a year ago in some of the high-demand locations of central San Diego, which is gradually having a “compression” effect elsewhere in the county as tenants seek out lower-priced space appropriate to their needs.

“The landlords are now in a position where they’re able to push rents up, and that hasn’t been the case for three or four years,” Aberg said.

Bob Willingham, director in the Carlsbad office of Cushman & Wakefield, which represented SR Commercial in the La Pacifica deal, said Oceanside is the one North County market that hasn’t yet absorbed the bulk of its available industrial inventory, and has long lagged behind markets such as Carlsbad and Vista.

That is gradually changing, especially as smaller companies scout location and expansion options within their means in an improving economy.

“For a while you were seeing mostly large companies increasing their space, but now you’re seeing some of the smaller companies looking around,” Willingham said. “You’re seeing more activity in the incubators and business parks now.”

SR Commercial Principal Adam Robinson, who co-founded the firm with Principal CJ Stos in 2009, said the company has acquired more than $50 million in Southern California industrial properties over the past 12 months. The bulk of the transactions were off market, not formally listed for sale, and the firm’s recent strategy includes locking in still-low borrowing costs before interest rates rise.

Robinson said the North County market has recently attracted a variety of firms from various industries, including some looking to serve multiple Southern California markets from a base close to local freeways. That includes companies in industries such as craft beer brewing, retail and industrial supplies, seeking warehouse and distribution space.

“Some of these companies want to be in North County so that they can serve customers in San Diego and Orange counties, and also into Riverside County,” Robinson said.

Bill Dolan, first vice president in CBRE’s San Diego office, said the overall pace of economic recovery for the industrial sector remains slow, but the region is seeing improvement tied to the rise in home construction, as building supply and home improvement firms boost their real estate footprints.

Dolan estimated that the housing market accounts for about 30 percent of local industrial space use.

The defense sector retains a split influence, with contractors tied to the production of aerial drones ramping up space needs, while others downsize or delay expansion until federal budget issues are resolved.

Eroding Concessions

Recent job growth is likely a harbinger of increased industrial demand countywide, to the advantage of landlords. “Rents overall probably reached bottom in 2012, and you’re seeing the concessions eroding at this point,” Dolan said.

CBRE noted that the first quarter saw the region’s first industrial construction delivery since the third quarter of 2011 — a 129,845-square-foot build-to-suit for Hoist Fitness in Poway. Otherwise, local brokerage firms reported, the only industrial project under construction at the end of the first quarter was a 31,246-square-foot space in Torrey Pines, fully pre-leased by the J. Craig Venter Institute.

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