JLL Income Property Trust has acquired South San Diego Distribution Center for $158.5 million from an affiliate of the Murphy Development Company. The three-building property totals 665,000 square feet, and it is 96% leased to eight tenants.
JLL purchased the property with the assumption of an in-place, $72.5 million first mortgage at 3.18% fixed-rate. The mortgage is interest only for another four years with a maturity in 2031. In addition, JLL issued $75 million in Operating Partnership units to the sellers. The remainder of the purchase was funded with cash on hand.
JLL was attracted to the property due to the strong industrial dynamics in San Diego, which has nearly 200 million square feet of industrial product and limited ability to build more due to geographic barriers. According to JLL, the market has a 3% vacancy rate. The South San Diego Distribution Center is located in Otay Mesa about 1.5 miles from the US-Mexico border and the Otay Mesa Port of Entry, the most active truck border in the California and the second most active in the US.
As a result of the limited supply, industrial rents in San Diego have steadily climbed. In the fourth quarter of 2021, rents increased 5% in the market, according to research from Marcus & Millichap, to $16.80 per square foot. Rents in the market have grown consistently each quarter since the start of the pandemic. As rents have increased each quarter, the vacancy rate has also inched down. In the fourth quarter, San Diego had a 4.4% industrial vacancy rate, down 70 basis points from the previous quarter. The vacancy rate has been on a downward trend since 2019, when the rate peaked at nearly 6%, according to the report.
Although industrial leasing activity has been healthy through the pandemic, investment activity paused in 2020 due to uncertainty. Research from JLL shows that industrial investment was down 50% in 2020, although appetite returned in the third quarter.
With this purchase, JLL now has an aggregate industrial allocation of $1.8 billion, representing about one-third of its industrial portfolio, which includes 53 properties in 12 markets.
