Increases in Defense Spending Could Widen SD Space Footprints
Increases in Defense Spending Could Widen SD Space Footprints
Contractors Already Expanding Locally as Military Budget Grows
“San Diego is the second-biggest recipient of defense spending, after Virginia, so there’s going to be a ripple effect locally in terms of space needs,” noted Bryce Aberg, executive director in the San Diego office of Cushman & Wakefield.
A report issued recently by the San Diego Economic Development Corp. noted that defense-related spending contributed $25.2 billion to the regional economy during fiscal 2017, including more than $9 billion in defense contracts procured by private firms. Total local defense spending is expected to reach $26.1 billion in fiscal 2018, according to researchers at Point Loma Nazarene University.
San Diego County is currently the nation’s second-largest recipient of defense procurement dollars after Fairfax, Va. The local procurement community consists of more than 5,600 firms, mostly small businesses, employing 62,000 people. That’s on top of the approximately 140,000 members of the armed forces stationed locally, the bulk at U.S. Navy and Marine Corps bases.
There’s already evidence that space is running out in local submarkets where the largest defense contractors have been expanding in recent years. Cushman & Wakefield data for the first quarter indicates, for instance, that the industrial vacancy rate in Poway, where General Atomics continues to grow operations related to unmanned aircraft systems (a.k.a drones), now stands at 1.2 percent, well below the countywide rate of 4.8 percent, which itself is historically tight.
Most recently, seller CT Realty Investors of Newport Beach announced that it had sold to General Atomics a 339,337-square-foot Poway industrial “flex” building for $44 million. General Atomics did not respond to a request for comment and, like most major defense contractors, rarely engages in public discussions of its real estate operations.
In the latest deal, General Atomics purchased a property that it had already been leasing for some time. CoStar data indicates that General Atomics has made $234.5 million in local property acquisitions and $6.7 million in dispositions during the past five years. In terms of its total current real estate footprint, including owned and leased space, it is San Diego’s largest defense contractor, spanning 4.35 million square feet at multiple locations – about two-thirds of it in Poway alone – according to Cushman and CoStar data.
Numbers from Cushman and local economic development agencies show that General Atomics is also the largest local contractor based on the dollar value of current defense contracts, at $2.6 billion.
The second largest for contract value, Northrop Grumman ($1.56 billion), holds the same rank locally for total square footage, at 2.5 million – most of it in Kearny Mesa and Rancho Bernardo.
Aberg said there is limited space to build new industrial product in the northeastern submarkets along Interstate 15, where contractors like General Atomics and Northrop Grumman have steadily grown their presence. That means there could be future property tear-downs and re-purposings in those northeastern San Diego submarkets as the contractors seek to keep operations clustered, as well as in traditional central San Diego submarkets that host defense firms.
Aberg noted that the border-adjacent South County, as well as North County markets like Oceanside, are already drawing rising interest from the defense industry, which finds itself competing for available industrial space region wide with other growing sectors like technology and e-commerce logistics.
If recent economic projections prove correct, the defense industry will contribute to more tightening of the local industrial market in coming years, fueled by rising contract demands. Those projections are driven by factors including the Trump administration’s proposed federal budget calling for $686 billion in Defense Department spending in fiscal 2019 – up $80 billion, or 13 percent, from 2017.
In the meantime, there are at least two San Diego sites where the U.S. military, thanks to technological and other streamlining, finds itself able to shrink its physical presence at large campuses it has occupied for several decades. The Defense Department is looking long-term to turn over much of the excess land to commercial developers for other types of compatible uses, such as hotels, retail and non-military offices.
In San Diego’s Midway District near Old Town and Interstate 5, the Navy is in early talks with city planners to redevelop its 62-acre technology research and development complex, known formally as the Space and Naval Warfare Systems Command (SPAWAR).
The Navy is aiming for a public-private partnership in which private entities would develop new buildings that SPAWAR needs on about 20 acres. In exchange, private developers would get the remaining 40-plus acres to build commercial elements.
A similar public-private project is already in progress on the downtown San Diego waterfront, where local developer Douglas Manchester has completed early demolition work for a $1.3 billion, mixed-use redevelopment of the Navy’s Southwest headquarters complex, portions of which date back to the 1920s.
That project, called Manchester Pacific Gateway, has been in planning since 2006 and has received city approvals and overcome numerous environmental and other legal challenges. However, development of planned new elements – including hotels, new Navy offices, non-military commercial offices and public plazas – remains on hold as the developer lines up financing.
Developer Manchester is now President Trump’s nominee to be the next U.S. ambassador to the Bahamas, with Senate hearings still pending. It is not known how the downtown project would be impacted if Manchester is ultimately approved for the post.
By: Lou Hirsh, San Diego Market Reporter CoStar Group
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