Inside the ‘Explosive’ Growth in Otay Mesa’s Industrial Market

Otay Mesa has grown into a dynamic industrial market driven by trade with Mexico, a new border crossing and availability of quality industrial space.

Otay Mesa’s industrial market is seeing explosive growth. The market has grown into a dynamic market with multiple demand drivers, and it is growing. BKM Capital Partners is very bullish in general on the San Diego industrial market, and sees incredible potential in Otay Mesa. The firm recently acquired a 703,215-square-foot multi-tenant industrial asset in the market to gain a strong presence in the area. The property is 97% leased, but BKM plans to roll the leases to take advantage of the rapidly rising rental rates.

“This is something of critical mass in Otay Mesa, and I think that is important. There is 30 million square feet South County, so this 700,000-square-foot property gives us a good foothold in the market,” Brett Turner, director of acquisitions at BKM Capital Partners, tells GlobeSt.com. It allows us to move our weight around.” This particular asset has tenants ranging from 3,200 square feet to 150,000 square feet, so it is right in BKM’s wheelhouse. Rents are 24% below market, so our game plan is to roll tenants over and moving tenants up to market. The market has seen explosive growth, especially lately. This isn’t a huge capital play for us. It is really about managing the rent roll, which is what we do best.”

The market has benefitted from what Turner calls the perfect storm of drivers. Lower cost labor in Mexico and a new commercial port of entry have helped to boost demand, and there has been a recent increase from defense users. Additionally, the San Diego industrial market in Central and North County is tight, and tenants are looking for a lower cost alternatives. If you look up the tenant base of the make-up of Otay Mesa, 10 years ago, 80% of the tenants were connected to trade with Mexico. Today, it is only 50%,” says Turner. “As tenants are getting pushed out of the central and north markets in San Diego, they are looking for a flight to affordability, and that is Otay Mesa. This year alone, 70% of the leases signed in Otay Mesa were by tenants moving from outside of the market. There is a big surge of tenants coming into the market. This paired with the low cost of Mexican labor has created the perfect storm.”

Despite the diversity of users, the majority of the industrial product is distribution facilities. Otay Mesa, thanks to the availability of developable land, has a healthy supply of class-A space. ‘If you want class-A distribution space, you can’t get it in Sorrento Mesa,” says Turner. “You have to come south, and that is really where the market is excelling.”

This demand will fuel Otay Mesa or years. BKM, which already owns 1 million square feet in the San Diego market, will continue to look for opportunities in Otay Mesa. “Our strategy is to expand in San Diego,” says Turner. “It has a ton of growth and a ton of demand drivers. We are bullish on San Diego.”