Q1 2025 San Diego Industrial Market Report
Key Findings
- With 3.1 million SF of flex industrial space under construction, San Diego’s pipeline will put additional supply-side pressure on vacancies this year.
- Market participants remain optimistic about a possible increase in demand as leasing activity picked up in late 2024 and moving into 2025. Even so, a recovery in demand could be delayed until 2026 due to long-term uncertainty among large corporate users.
- The 200 basis point increase in vacancy last year, has left the rate at 8.3%. This is 150 basis points above the national benchmark of 7.1%
By the Numbers
- Sales Volume: $311M
- Average Sale Price Per SF: $328
- Cap Rate: 3.1%
- Vacancy Rate: 8.3%
- Average Market Asking Rent Per SF: $22.80
- SF Under Construction: 3.3M
- SF Delivered: 860K
- SF Absorbed: (761K) | Source: CoStar Group
San Diego Demographics
- Unemployment rate: 4.7%
- Current population: 3,291,487
- Households: 1,197,728
- Median Household Income: $107,705
San Diego’s economy is fueled by the military, technology, and tourism. The city has over 140,000 active duty and civilian military members. According to the San Diego Military Advisory Council, the military business employs 370,000 people in the region, accounting for about one-quarter of all occupations in the county. That represents over 25% of the economy. In mid-2024, the City of San Diego began construction on the West Coast’s largest general aviation airport redevelopment project in Otay Mesa. The first phase is projected to be completed by the end of 2025. The modifications are expected to increase its appeal for international trade and as a receiver airport, with a regional economic impact of $1.5 billion.
Market Performance
San Diego’s industrial market faced ongoing challenges in Q1 2025, marked by its eighth consecutive quarter of occupancy losses. This further pushes the vacancy rate to 8.7%, the highest level since 2013. Despite this, late 2024 leasing activity, especially from large occupiers, offered a glimmer of hope for market stabilization.
However, demand remained bifurcated: large-block leasing (50,000+ SF) slowed considerably due to corporate cost-cutting. In contrast, small-bay spaces under 10,000 SF drove most of the leasing volume, supported by strong tenant demand in Central San Diego, Escondido, and Vista. Rent growth slowed to 2.1% year-over-year, falling below the long-term average (3.9%), with landlords offering increased concessions—such as up to five months of free rent—to secure deals.
Construction
Construction activity remained elevated, with 3.1 million SF underway. Much of this is in Otay Mesa, though concerns about oversupply, particularly in the 100K–250K SF logistics segment, have led to a pullback in new starts. While long-term fundamentals remain strong, driven by regional logistics infrastructure and cross-border trade, full recovery may not materialize until 2026, once new inventory is absorbed and demand stabilizes.
Sales
Cap rates have risen to a range of 5% and 6%. Sales volume has seen a decrease from the historical high of $700 million in Q4 2024, to $267M in Q1 2025. Mid- and small-bay properties are witnessing cap rates in the low 5% area. This comes as buyers continue to drive NOI growth in the early stages of cash flow.
