Carlsbad Flex Market Improves as of 3Q 2014

Carlsbad-Flex-Industrial-AppraiserAfter several years of soft market conditions, the Carlsbad industrial market is strengthening and slowly improving. Due to overbuilding, the Carlsbad market has been very soft for several years, however; vacancy has decreased for industrial and flex product over the past three years. Due to a lack of new construction and increasing demand, vacancy rates are anticipated to continue to decline in Carlsbad for both industrial and flex product.

The Carlsbad Research Center is the largest industrial park within the city. This 559 acre master planned R & D park includes office, single and multi-tenant industrial and R & D buildings. The CRC is one of several light industrial business parks in the city, including the Carlsbad Airport Business Center, the Carlsbad Airport Center, the Palomar Airport Business Park, Bressi Ranch Business Park, Palomar Forum Business Park, Raceway Business Park, Carlsbad Oaks and Carlsbad Oaks North Business Park. All of these parks are in the central portion of the city, within the general vicinity of the McClellan-Palomar Airport.

Per the City of Carlsbad September 2014 Development Monitoring Report, 10,858 SF of industrial space as permitted in September, as well as fire Station #3, northwest of the intersection of Cannon Road and Wind Trail Way. Fiscal year to date, there has been 34,334 SF of commercial/industrial permits issued as compared to 36,035 SF at this time in fiscal year 2013-2014. There have been 92,018 SF of industrial development permitted in calendar year 2014.

Review of Carlsbad pending planning applications as of October 2014 show there are pending permits for a two-story shell building on the north side of Dryden Place between Palomar Oaks Way and the end of the cul-de-sac, as well as martial arts fitness facility at 2706 Gateway Road. These are the only pending commercial/industrial applications in the Carlsbad industrial area.

During the last five years, development has been at a near standstill due to recessionary economic conditions and a glut of industrial and office space surrounding McClellan-Palomar Airport.  There has been little new office or industrial construction since the start of the recession as existing properties can be purchased for less than development costs. There have been no deliveries of flex space since 2009.

Occupancy rates for industrial product have been steadily climbing since the beginning of 2012. Rental rates, however; have climbed only slightly within that time.  In the third quarter of 2011, Costar showed industrial vacancy in Carlsbad at 14.4%, which was unchanged from the 4th quarter of 2010. Costar shows current industrial vacancy at 11%. Costar showed flex properties in Carlsbad with 17.8% vacancy in the 3rd quarter of 2011. Currently Costar shows 15.1% vacancy for flex properties in Carlsbad. Rental rates have remained relatively stable over that time, with increases for flex properties shown over the past two quarters.

Absorption has been positive over the past three years for industrial product. Narrowing our analysis to flex properties within the Carlsbad McClellan-Palomar Airport industrial submarket, 266 properties show a 14.8% vacancy rate, with an average lease rate of $12.78/SF annually, and available space on the market for 12.6 months. This is down from 22 months three years ago, and a 5-year average of 13.8 months. Vacancy rates have declined steadily since 2011, with positive absorption of flex product over the past three years. Rental rates were relatively flat from the latter part of 2012 to the first quarter of 2014, but have been steadily increasing in the past two quarters, as have occupancy rates.

Local brokers report flex product for sale in Carlsbad is frequently not listed on the open market as known potential purchasers are selectively informed and projects sell within very brief marketing periods, typically under 60 days. Brokers report there are more potential buyers than good quality flex properties for sale.

With continued improvement in the economy, conditions for industrial and flex properties are anticipated to continue to improve. Considering the anticipated absorption of excess product and very little new product anticipated to come on line for at least 2 years, market conditions are expected to continue to stabilize, with upward pressure on rents anticipated as vacancy declines.

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