Economic Overview
San Diego employment increased by 10,900 jobs, or 0.7% year-over-year (YOY), between August 2025 and August 2026.¹ This modest growth continues to trail historical trends and constrain demand. Health care accounted for the largest gains, adding 12,300 jobs (+5.0% YOY), though the sector generates relatively limited direct demand for warehouse and distribution (W/D) space. Other sectors posted moderate gains, including leisure and hospitality (+5,500 jobs, +2.6% YOY) and administrative and support services (+3,100 jobs, +3.6% YOY). However, employment growth across industrial-related sectors remained subdued, with construction, manufacturing and transportation and warehousing all recording job losses.
The unemployment rate declined modestly to 4.9%¹ from 5.1% YOY but remained above the Q3 2026 average of 4.5%, reflecting a relatively stable labor market despite slower hiring activity. Because employment gains remained concentrated outside industrial-related sectors, near-term demand for W/D space is expected to remain measured. Looking ahead, employment is projected to grow 1.0% in 2026 and 0.8% in 2027,² both below the five-year historical average of 1.8%. These projections suggest continued near-term headwinds for industrial demand, with leasing activity likely to remain moderate and driven primarily by specific tenant requirements rather than broad-based expansion.
Supply and Demand
San Diego's overall vacancy rate, including sublease space, increased 40 basis points (bps) quarter-over-quarter (QOQ) and 20 bps YOY to 7.6% in Q3 2026. Market-wide occupancy declined, with negative net absorption of 103,323 square feet (sf). Notable move-ins, including Amazon's 222,000 sf, were more than offset by significant move-outs, including BD's departure of 318,000 sf in Sorrento Mesa.
Direct vacancy rose to 7.2% (+40 bps YOY), while direct available space increased by 1.7 million square feet (msf) over the past 12 months, pushing the direct availability rate to 9.4% (+100 bps YOY). Sublease vacancy remained limited at 0.4%, down 30 bps YOY, while sublease availability declined 30 bps YOY to 1.4%. The widening gap between vacancy and availability suggests additional space could enter the vacant inventory as existing leases expire, potentially prolonging the market's recovery.
Tenant Trends
Leasing activity totaled 1.6 msf in Q3 2026, down 22.0% QOQ and 4.8% YOY, but remained above the five-year quarterly average of 1.3 msf. Year-to-date (YTD), manufacturing led all sectors, accounting for 29% of new leasing volume, followed by transportation, warehousing and utilities (17%) and retail (15%). Despite softer quarterly leasing volume, activity continued to demonstrate demand from a diversified mix of industrial occupiers. Otay Mesa led leasing activity, accounting for 18% of total volume, followed by Miramar (11%) and Vista (9%). Carlsbad and East County each accounted for 8%. Vacancy remained lowest in Central County (5.2%) and North County (6.8%). South County recorded the highest vacancy rate at 12.8%, increasing 160 bps QOQ, primarily reflecting new supply additions, including the delivery of Otay Business Park, which added 612,240 sf of vacant space.
Capital Markets
Investment volume totaled $241 million (M) in Q3 2026, declining 34% QOQ and 9% YOY and remaining well below the five-year quarterly average of $468M. Average sale prices declined to $234 per square foot (psf), down 21% QOQ and 4% YOY.³ Lower transaction volume and declining sale prices reflect continued investor selectivity amid elevated financing costs and uncertainty surrounding near-term industrial fundamentals.
Pricing
The average asking rent across all product types rose 0.5% QOQ but fell 2.3% YOY to $1.45 psf per month on a triple-net basis. Research and development (R&D) space recorded the largest YOY decline, falling 3.8%, followed by manufacturing space, down 3.6%. Rental performance varied across the county, with South County average rent recording the largest YOY decline at 5.0%, followed by Central County (-1.3%). In contrast, North County average asking rent increased 4.3% YOY. These divergent trends highlight how localized supply conditions and tenant demand affect pricing.
Future Inventory
As of Q3 2026, approximately 811,890 sf remained under construction across San Diego County, including 483,000 sf in East County, 177,000 sf in Kearny Mesa and approximately 132,000 sf in Otay Mesa. An additional 6.6 msf of proposed projects remained in the pipeline, with Otay Mesa accounting for 59% (3.9 msf).
Construction activity remains concentrated in select submarkets, while the broader development pipeline faces continued pressure from financing costs, elevated vacancy and slower leasing velocity. Developers are increasingly phasing projects and evaluating tenant demand before moving forward with new construction.
