The tides have reversed in the San Diego industrial markets for warehouse landlords and tenants. From Oceanside to Otay Mesa, tenants will now benefit from the slowed demand for industrial space and a spike in supply in all submarkets.

It’s been over four years since 2020-2022 Covid-related industrial space demand caused a sharp spike in the San Diego industrial market, raising lease rates to record levels and pounding availability levels down to nearly 3% countywide. But since then, demand has cooled and availability for industrial space for lease and sublease has done a full reversal. Today there is breathing room for industrial users, with more empty and functional industrial space available in every submarket of the region.

The industrial availability rates in Vista, Miramar and Kearny Mesa have gone from single digits in 2022 to over 10% today. The Otay Mesa submarket, which experienced over three million square feet of new construction in that time frame is now at a high teens availability rate and trending higher as we enter the summer months. Nearly all of the industrial new construction in San Diego County since 2022 occurred in the Otay Mesa area.

San Diego real estate developers, especially those developers in the Otay Mesa submarket, thought the 2021-2022 demand would last forever and overbuilt the market, forgetting that demand continues in cycles versus straight lines. As with prior downturns, much of the overbuilding was caused by developers not wanting to miss the demand window, so they jumped into the industrial property frenzy to beat other competitors to market, all coming online at the same time.

Spiking Supply of Industrial Sublease Space

Today there is almost two million square feet of industrial sublease space available in San Diego County, a level not seen since 2010. E-commerce companies and other distribution tenants who bit off more than they could chew the past couple years are now dumping space, and we are seeing availabilities increase for industrial space. All of this space is being offered at major discounts, much of it fully racked and furnished, and free rent concessions are being offered to attract replacement tenants.

The dramatic rise in industrial sublease space is illustrated in the graph below. Never in history has the San Diego area witnessed such an extreme spike in subleases in only a two-year span from 2022 to 2024. Growing from 225,000 square feet in Q1 2022 to almost two million square feet, this increase represents an 8.5x increase in just over two years.

This spike in sublease supply inventory, combined with the new construction deliveries, has caused a sudden and dramatic shift in the industrial market dynamics.

This flood of both sublease space and new construction—along with space coming back to market as some tenants begin to downsize when leases expire or let leases lapse—has brought market availability conditions back to pre-Covid levels, and even higher in the Miramar, Kearny Mesa and Otay Mesa submarkets.

How to Properly Leverage the Current Market

While this has occurred, asking rents for industrial space across San Diego remain unchanged. A business owner or executive running an industrial company would naturally wonder how availability rates have gone back to pre-Covid levels, yet market rents have not changed back to those same levels. The reality is that landlords and their conflicted brokers that promote the owners’ listings don’t want tenants to know about any of this, and we are sure you are reading it here for the first time. Landlords work cooperatively to set prices and the brokerage community—as the landlords’ outsourced sales and marketing teams—work to price support the marching orders from their landlord core customers.

The fact is that the industrial market in San Diego has dramatically weakened over the last year, and conditions are bound to get worse for landlords. While it’s not yet a complete tenant’s market, the leverage that a tenant can generate with the right representation and real estate strategy is better than it’s been in four years. Working with a tenant advocate that understands this shift and how to exploit this change in the market is critical, and the full-service brokers working on their dual agent platforms have a busted model for supporting tenants in this regard.

Marketing statistics provided by CoStar.