South Bay in Demand : Industrial Leases Hit Record Levels in 1987

Leasing of industrial buildings in San Diego County reached record levels in 1987, a reflection of a robust San Diego economy as well as the weakened dollar and its beneficial effect in opening up foreign markets for locally produced goods.

The South Bay region of the county, including Otay Mesa, witnessed particularly strong tenant demand for industrial buildings as did Carlsbad and the Carmel Mountain Ranch area along Interstate 15, area brokers said. In most brokerage surveys, the industrial category includes warehouse, manufacturing and research and development buildings.

“The manufacturing component (of the local economy) is starting to pick up. A little more than $12.2-billion worth of goods were manufactured here in 1986 and we expect (to report) a good gain on that for 1987,” said Max Schetter, senior vice president and research director for the Greater San Diego Chamber of Commerce.

Schetter added that industrial capacity is being expanded because locally based exporters of products ranging from biomedical devices to furniture are finding increasing demand for their goods because of the weakened dollar.

Tenant’s Market

Despite the high leasing activity, there were indications that certain areas of the county remain overbuilt, particularly Sorrento Valley and Carlsbad. Owners of buildings in those areas must offer significant concessions in the form of several months of free rent or discounts to attract tenants.

“It’s still a tenant’s market place and I see that continuing over the rest of the year,” said Greg DeLong, an industrial space specialist with Coldwell Banker’s University Towne Centre office. He said “financially strong” tenants looking for space in Sorrento Valley and along the Interstate 15 corridor can command up to 22% discounts on long-term leases.

Five million square feet of manufacturing, warehouse and research and development buildings were leased countywide last year, 25% more than the 4 million square feet leased during the previous year, according to Grubb & Ellis, a commercial real estate brokerage in San Diego.

Although Coldwell Banker has not compiled its year-end total for industrial space leased in the county, the San Diego real estate brokerage said leasing was running ahead of last year. For the first nine months of 1987, leases of industrial, warehouse and R&D; buildings totaled 2.74 million square feet, up from 2.6 million square feet over the same three quarters last year.

Steve Scott, a Grubb & Ellis broker, said 1987 was characterized by an unusual number of large leases of 30,000 square feet to 100,000 square feet.

Among the year’s big deals were the 100,000 square feet leased by Applied Micro Circuits Corp. in Sorrento Mesa, the 60,000 square feet leased by Aldila golf club manufacturers in Rancho Bernardo and 40,000 square feet taken by International Totalizator Systems in Carlsbad. Maxell signed a 60,000-square-foot lease in Otay Mesa for a floppy disk plant.

Oversupply Adjustment

The county’s industrial market is still adjusting to the severe oversupply of industrial buildings that peaked in 1985. And there may be little chance that the oversupply, at least in general terms, will abate over the next year or two, based on the relatively high level of building permits issued in 1987 for structures expected to be ready for occupancy over the next 18 months.

Some brokers expect tenant demand for industrial buildings, particularly in the South Bay, to heat up next year as more manufacturers start operations in tandem with maquiladora plants in Baja California.

“We are working with several Fortune 500 tenants in the process of leasing or purchasing property (in South Bay and Otay Mesa), “ said Mike Smith, a broker with Coldwell Banker in San Diego. “We see 1988 as stronger than 1987, based on the potential tenants we’re working with.”

According to Burbank-based Construction Industry Research Board, San Diego County building permits for $126 million worth of industrial buildings were issued last year, up from $105 million in 1986. In 1985 and 1984, industrial building permits in the county totaled $132 million and $140 million, respectively. In 1983, permits totaled only $65 million.

In a statewide comparison, the county’s industrial permits placed fifth behind Los Angeles County ($480 million), San Bernardino County ($248 million), Orange County ($160 million), and Santa Clara County ($128 million), said Ben Bartolotto of the construction industry board.