San Diego

REITs, Tenants Migrate to More Hospitable South County Market

Central San Diego and North County are still the top performers, but with land growing ever harder to find there, South County is coming into its own

South County is fast becoming the place to go for commercial real estate investors.

“There’s been more activity than I’ve seen in the last 10 years working the market,” said Mark Lewkowitz, a senior vice president with Colliers International commercial real estate brokerage.

“We’re starting to see more tenants that are non-Mexico related tenants, so I believe it’s going to make the market stronger overall if we do see a little bit of a pullback or correction,” said Lewkowitz, whose specialty is industrial property south of Interstate 8.

“These institutional REITs (Real Estate Investment Trusts) based out of Los Angeles and San Francisco areas are now coming to Otay Mesa when they didn’t in the past,” he said. Central San Diego and North County are still the top performers, but with land growing ever harder to find there, South County is coming into its own.

“There’s still plenty of land for sale,” said Linda Greenberg, a principal with Lee & Associates commercial real estate brokers.

Greenberg said there have been several notable land sales in Otay Mesa recently, including about 65 acres of undeveloped land that will be used as the site for a distribution warehouse.

Rendering Courtesy of Port of San Diego
A planned bayfront hotel and convention center in Chula Vista is expected to spark new development in South County.

Vacancy Rates

In the meantime, the amount of available space in finished buildings is getting tighter.

“The vacancy rate is telling,” Lewkowitz said.

As of April, he said vacancy rate for industrial property was running around 6 percent.

CBRE, a commercial real estate brokerage, reported an even lower vacancy rate of 5.4 percent for industrial property in South County.

By comparison, CBRE reported that the vacancy rate for industrial property at the end of the quarter was 6.9 percent in North County and 4.8 percent in Central County.

“Industrial has been really strong,” said Erik Parker, a CBRE vice president who specializes in industrial property.

“We’ve seen existing tenants expand. We’ve seen a fair amount of new migration to that market,” Parker said.

Rents for industrial space are lower in Otay Mesa than elsewhere in the county and Parker said that’s drawn increased interest in the area from tenants looking to expand, relocate or open a new operation.

The flip side of that is that rents have risen high enough for industrial space in Otay Mesa that investors see as a profitable place to build, said Andy Irwin, a vice president of JLL, a commercial real estate brokerage.

“What’s prompting a lot of this new development is that rents have finally reached a point where it pencils on these projects,” Irwin said.

On the office side, CBRE reported that the vacancy rate for office space in South County was 6.7 percent at the end of the first quarter of 2019 — meaning that available space was becoming ever tighter.

By comparison, CBRE reported that the vacancy rate for office space in North County was 14.1 percent at the end of the first quarter, 12.1 percent downtown and 9.2 percent in Central County.

Looking ahead, Chesnut Properties will soon begin construction on the first 150,000 square foot building in a 1.4 million square-foot office park it’s planning at the eastern edge of Chula Vista — its Millenia Office.

“We could be breaking ground in 90 days,” said Lee Chesnut, the company’s founder and principal.

“We’ll be building the second building within 12 months of starting the first,” Chesnut said. “I think the South County is poised to just explode from pent up demand.”

His project is seen as a key to making South County more of a live-work market instead of a bedroom community where most of its residents commute to work elsewhere.

Also on the horizon in 2019 is the groundbreaking for a $1 billion Bayfront hotel and convention center in Chula Vista, said Cindy Gompper-Graves, president and CEO of the South County Economic Development Council.

“Once that ground gets broke, we anticipate a lot of construction jobs and a lot of infrastructure as this moves forward,” Gompper-Graves said. “We also think this will be a catalyst for other projects going forward as soon as the sticks go up.”

Gompper-Graves said she also expects the University of Saint Katherine’s to break ground within the next 18 months for a new campus on a 10 acre site in eastern Chula Vista as the school moves ahead with plans to relocate from San Marcos.

Residential development and sales have also been strong in South County, although they were off in the first quarter of 2019 from where they were in 2018, said John Newton, who specializes in multifamily property sales for CBRE.

“We just haven’t seen quite as many transactions as last year,” he said. “Overall though, there’s still a good amount of demand.”

Some potential buyers may have balked when interest rates rose toward the end of 2018, Newton said.

“We will probably get a bit of a bump now that rates have floated back down,” he said.

Although some of the past reluctance among companies to locate in South County has dissipated, some impediments remain.

Irwin of JLL said some land owners have been slow to do the environmental studies and other work to entitle their land so it would be ready to be developed.

That may have worked to the region’s favor in one respect, Irwin said, because it means that the market has had tempered growth rather than a splurge of new property coming available all at once.

Greenberg of Lee & Associates said low test scores in some South County schools also may make some executives hesitant to come to South County.

Talk of an immigration crisis also hasn’t helped, Greenberg said.

“Immigration is not impacting the border,” Greenberg said. “The rhetoric is not very helpful.”

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