Rising availability and negative absorption point to tenant leverage despite continued deal flow and active development pipeline
San Diego’s industrial market entered 2026 with a shift in tone, as rising vacancy and negative absorption signaled a market adjusting to recent supply and more selective tenant demand. A first-quarter report from Kidder Mathews shows that while leasing activity remained active, underlying fundamentals softened.
Direct net absorption turned negative at 826,930 square feet, reversing the prior quarter’s positive momentum and marking a continuation of the uneven demand pattern seen over the past year. Vacancy climbed to 9.7 percent, up 40 basis points from the previous quarter and 140 basis points year over year, reaching its highest level in more than a decade. Availability followed a similar trajectory, rising to 13 percent.
“The San Diego industrial market posted negative 826.9K square feet of direct net absorption in 1Q26,” the report states. “The quarter’s pullback reflects a return to negative net absorption to start the year, even as leasing activity remained steady.”
That balance—softening occupancy metrics alongside stable leasing volume—defines the current phase of the cycle.
Leasing volume reached just over 2.1 million square feet across 348 transactions during the quarter, representing a modest increase from the previous quarter but a notable decline compared to the same period a year ago. Occupiers continue to transact, but the report indicates a clear shift in behavior, with tenants focusing on well-located and functional buildings rather than expanding aggressively.
This trend is particularly visible in larger industrial clusters such as Otay Mesa, where several of the quarter’s most notable transactions occurred. Martin Home Furnishings renewed 115,510 square feet at 2345 Britannia Boulevard, while Bose Corporation renewed 112,430 square feet at 8863 Siempre Viva Road. Republic Moving signed a new lease for 77,154 square feet at 8140 St. Andrews Avenue. Outside of Otay Mesa, activity extended into North County, where Laird Technologies leased 62,381 square feet at 2091 Rutherford Road in Carlsbad through Prologis, and TUV SUD took 56,835 square feet at 5810 Van Allen Way.
Despite this volume, the overall direction of demand is more measured. The report notes that leasing is increasingly concentrated in modern inventory, particularly buildings that meet current operational requirements for logistics and distribution users.
Rising Vacancy Reflects New Supply and Slower Absorption
The increase in vacancy is tied both to new deliveries and slower leasing absorption of recently completed space. Approximately 123,705 square feet was delivered during the quarter, with an additional 1.2 million square feet still under construction. This pipeline is heavily concentrated in South County, particularly in Otay Mesa, where large-scale projects continue to come online. Among the most significant developments is Amazon’s 1,077,413-square-foot facility at 6980 Otay Mesa Road, scheduled for delivery in the second quarter of 2026. Nearby, the first phase of Otay Business Park, totaling 612,240 square feet, is also expected to deliver in the same timeframe.
Additional construction includes a 165,000-square-foot project at 2830 Whiptail Loop in Carlsbad and a 133,933-square-foot development at RD Business Center in Otay Mesa.
These deliveries are adding pressure to vacancy in the near term, particularly in newer, larger-format buildings where leasing timelines tend to be longer. The report notes that “tenant leverage remains elevated, particularly in larger, newer blocks of space,” underscoring the shift in negotiating dynamics.
The report shows that pricing trends in both leasing and investment markets reflect this softening environment. Average asking rents declined to $1.46 per square foot on a triple-net basis, down 1.8 percent from the prior quarter and 3.7 percent year over year. While the decrease is relatively modest, it marks a clear break from the sustained rent growth seen in prior years. On the investment side, total sales volume reached $260 million across 1.4 million square feet in 54 transactions. Pricing also moved lower, with the average sale price declining to $307 per square foot from $342 in the previous quarter and $347 a year earlier.
The largest transaction of the quarter was the sale of Kearny Mesa West, a 210,916-square-foot property acquired by H.G. Fenton Company from CIM Group for $74.15 million, or $351.56 per square foot. Other notable sales included a 133,844-square-foot property at 13100 Danielson Street in Poway, purchased by Realty Income from New York Life Investments for $43.3 million, and a 110,663-square-foot asset at 1111 Pioneer Way in El Cajon, which traded for $22.5 million. These transactions indicate that capital remains active in the market, but buyers are more cautious on pricing, particularly as interest rates and broader capital market conditions remain selective.
Performance across San Diego’s submarkets remains uneven, reflecting differences in product type, location, and tenant demand. Central County posted some of the largest negative absorption figures, while North County also saw declines, particularly in Vista and Carlsbad. In contrast, parts of the I-15 Corridor showed positive absorption, including gains in Poway and Scripps Ranch.
Meanwhile, vacancy rates vary widely across the region. Sorrento Mesa and UTC continue to exhibit elevated vacancy, with rates exceeding 20 percent in some cases, while tighter conditions persist in areas such as Poway and East County submarkets, where vacancy remains below 3 percent. These disparities reinforce the report’s broader point that demand is not disappearing but is becoming more selective and location-driven.
Economic Backdrop Remains Stable
The broader economic context offers some support to the market, even as near-term indicators soften. Manufacturing employment in the San Diego metro area declined slightly to 108,500 jobs, down 2.4 percent year over year, while trade, transportation, and utilities employment also saw a modest decline. However, the region’s unemployment rate stood at 4.4 percent, below the California average, reflecting relative stability. San Diego’s diverse economic base—spanning defense, life sciences, tourism, and cross-border trade—continues to provide a foundation for long-term industrial demand, even as short-term fluctuations play out.
Looking ahead, the near-term outlook suggests that current conditions will continue, with tenants maintaining negotiating leverage until new supply is absorbed. The report concludes that while demand remains intact, it is more targeted and deliberate, particularly in modern facilities. As new developments deliver and are gradually leased, vacancy is expected to stabilize, though that process may extend through the remainder of the year. For now, San Diego’s industrial market is in a period of recalibration—still active, still liquid, but operating under a different balance between supply and demand than in the past several years.
