LEE & ASSOCIATES COMMERCIAL REAL ESTATE SERVICES- NORTH SAN DIEGO COUNTY1900 Wright Place, Suite 200 | Carlsbad, CA 92008 | 760.929.9700 (M) - 760.929.9977 (F) | www.lee-associates.com

Information contained herein has been obtained from sources we deem to be reliable. While we have no reason to doubt its accuracy, we do not guarantee it.

MULTI-TENANT INDUSTRIAL MARKET NORTH SAN DIEGO COUNTYBy Isaac Little| CalBRE Lic # 01702879

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The multi-tenant industrial market in North San Diego County has seen drastic change over the past year from both leasing and investment standpoints. Rapidly decreasing vacancy rates for small industrial space has caused asking lease rates to soar upward across North County. The combination of rising lease rates and low vacancy rates is the number one driving factor behind the major push to purchase these highly sought after multitenant assets.

Multi-Tenant Leasing Market

For small tenants, it has become increasing difficult to find small industrial space to lease throughout North County. Vacancy rates for industrial space under 1,500 Square feet has dropped below 2.5% with fewer than 20 spaces available through all five cities combined. Currently, the average asking base rent for space under 1,500 square feet is approximately $1.02/SF + common operating expenses (CAM), while the five-year average asking base rent is $0.84/SF + CAM with CAM’s averaging approximately $0.10/SF. The average time that small space under 1,500 square feet is sitting on the market has dropped to approximately two months.

Source: CoStar

$1.05

$1.00

$0.95

$0.90

$0.85

$0.80

$0.75

$0.70

$0.652011 2012 2013 2014 2015

ASKING RENT PER SF: 750-1,500 SF

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LEE & ASSOCIATES COMMERCIAL REAL ESTATE SERVICES- NORTH SAN DIEGO COUNTY1900 Wright Place, Suite 200 | Carlsbad, CA 92008 | 760.929.9700 (M) - 760.929.9977 (F) | www.lee-associates.com

Information contained herein has been obtained from sources we deem to be reliable. While we have no reason to doubt its accuracy, we do not guarantee it.

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Vacancy rates for industrial space between 1,500 and 3,000 SF have also decreased slightly below 5.0% across the North County markets. There are approximately twice as many options in the 1,500 to 3,000 SF range when compared to space under 1,500 square feet, but it is still slim pickings in certain submarkets. Current asking rents for space in this size range average $0.95/SF + CAM while the five-year asking base rents average $0.79/SF + CAM. The average time that small space in the 1,500 to 3,000 square foot range is sitting on the market is now approximately three months.

Source: CoStar

In addition to increased rental rates in the multi-tenant sector, rent concessions are down significantly from where they were one to two years ago. The vast majority of Landlords will not entertain any lease term under two years and many are holding firm on three year terms. For three year lease terms, Landlords are giving up approximately one month of free rent, while on two year deals, it is rare to see any free rent given up. With the strong tenant demand for small industrial space, I anticipate asking base rental rates to continue to increase another 8-10% across the board in the next six to nine months.

Multi-Tenant Investment Market

Multi-tenant industrial parks continue to be in high demand due to the points referenced above and the fact that you can purchase an existing property well below replacement costs. Any listed industrial multi-tenant investment is seeing anywhere from 10-20 offers from both 1031 exchange investors and local/national investment firms. Recent sale comparables reflect purchase prices ranging across the board, from $92/SF for a transaction in Oceanside to a recent $147/SF sale in San Marcos. Over the last year, CAP Rates have ranged from 5.0% to 6.75%. The properties trading with CAP Rates in the +- 5.0% range are typically properties with below market rents in place. Savvy investors are purchasing properties with much lower existing returns with the anticipation of raising existing rental rates to hit a pro-forma in the 6.5% to 7.0% range. Currently, I am aware of at least seven multi-tenant industrial parks which are currently in escrow and expected to close in the next 30-60 days in addition to another handful which are currently in negotiations. A vast majority of these transactions are being sold off market.

$0.95

$0.90

$0.85

$0.80

$0.75

$0.702011 2012 2013 2014 2015

ASKING RENT PER SF: 1,500-3,000 SF

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LEE & ASSOCIATES COMMERCIAL REAL ESTATE SERVICES- NORTH SAN DIEGO COUNTY1900 Wright Place, Suite 200 | Carlsbad, CA 92008 | 760.929.9700 (M) - 760.929.9977 (F) | www.lee-associates.com

Information contained herein has been obtained from sources we deem to be reliable. While we have no reason to doubt its accuracy, we do not guarantee it.

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Isaac Little | PrincipalLee & Associates Commercial Real Estate Services – North San Diego County, Inc.Direct: 760.929.7862| Office: 760.929.9700 | Fax: 760.493.4093ilittle@lee-associates.com | www.lee-associates.com/sandiegonorth/

Over the next 12 to 18 months, investor demand for multitenant industrial product should continue to strengthen provided interest rates remain low and lease rates continue to trend upwards as expected. In addition, the estimated replacements costs for this product type is approximately +- 150% of the cost to purchase an existing property. The high industrial land prices for what existing parcels remain have made it impossible to build multitenant and make it pencil as an investment. The combination of these trends have created a perfect storm for Sellers to maximize sales prices on their multitenant assets. If you own a multitenant industrial project and are considering selling, you should consider selling it now while the demand is here. Once interest rates go up we will see CAP Rates trend upwards which will have a direct impact on what investors are willing to pay for these properties.

Below is an overview of some recent sale comparables.

1 Picture: Address: Sale Date: Total SF: Price/SF: Projected CAP Rate: Occupancy

2 SR Heights, 298-304 Enterprise Street, Escondido CA 5/5/2015 76,495 $109.00 6.50% 90.00%

3 Copperwood Business Center, Oceanside 12/23/2015 125,000 $92.24 6.40% 90.00%

5 285 Pawnee Street, San Marcos 3/23/2016 19,040 $147.06 5.00% 100.00%

6 Simpson Business Pak, 1305-1317 Simpson Way, Escondido 2/13/2015 55,972 $130.42 5.50% 100.00%

7 2270 Camino Vida Roble, Carlsbad 3/15/2016 106,311 $128.40 6.25% 93.00%

8 OakRidge Business Center 1120 Sycamore Ave, Vista 7/14/2015 26,700 $104.87 6.70% 100.00%

9 Oceanside Commerce Center 4747 Oceanside Blvd, Oceanside 1/19/2015 70,399 $107.00 5.90% 96.00%

68,560 $117.00 6.04% 95.57%

Sale Comparables

Averages

Please contact Isaac with any questions at: 760.929.7861