January 15, 2015

San Diego Office Parties Like It's 2007

For the San Diego office market, strong fundamentals have landlords partying like it's 2007. 

Colliers' Tim Cowden and Chris Reutz gave us the skinny on San Diego's office market performance, which showed demand was strong in the past year. So strong the overall market absorbed 1.72M SF--the most absorption in nine years, led by Rancho Bernardo, which posted nearly 193k SF in absorption and UTC, which tallied 76k SF in absorption in Q4 alone. That was driven partly by Scripps Health's 131k SF expansion. The overall vacancy rate now stands at 12.2%, beating out the previous low of 12.3% in 2007. 

The duo says the market only looks to get better from here, especially as a lack of new development will keep tenants focused on existing inventory. “There is a finite inventory of buildable land for office space, and we're getting close to the limits of that in some submarkets where you'll have to tear down office buildings to build new ones,” Tim (here with his family building a snowman during New Year's Eve's freak snowstorm) says. This also translates to better rental rates for landlords: nearly $2.30/SF by year's end for all space, and edging closer to $3/SF for Class-A space, they say. 

There is currently a dichotomy in the performance of Downtown San Diego. The submarket's 10M SF of office space remained flat this year. And its official vacancy rate stands at 18.4%. But Tim says that will soon change given plans to convert two prominent office buildings into other uses, including the former Trobati Building at 625 Broadway, which is being converted to apartments; The Paladion at 777 Front St (here), the 156k SF office building that is expected to be converted into a condominium project; and 600 B St, where Lincoln Property is looking to convert the lower half of the 24-story tower into a hotel, Tim says. “Rather than being 20% vacant … it's really 13% vacant effectively,” he says. 

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Kidder Mathews Brings Out Big Guns

Seattle-based Kidder Mathews enters San Diego with a bang. The firm has a lineup of some of the city's most experienced commercial real estate vets, including former CBRE managing director Mark Read (second from right), and Cushman & Wakefield alums Bob Willingham, Ron King and Joe McDermott. This begs the question: Why trade off being with a national company to a more regional player in today's market? That's because San Diego's business climate is focused on small local companies and regional players. “There are a lot of brokers in San Diego who were in firms like Kidder Mathews who are now at the Big Four. That model works for some people,” Bob tells us. But he adds the group expects to leverage its tenant relationships to build up a pipeline of activity, while being part owners in the Kidder Mathews' office here. 

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Kidder Mathews expanded to the Bay Area three years ago with a handful of offices. But it recently secured a major property management contract with a division of Bristol-Myers Squibb, giving the firm control of 800k SF in San Diego. Suddenly, the firm needed local talent. And with rising activity, Mark says it will help the crew grab new business. “We're seeing vacancies shrinking and rents rising in virtually every product type and every submarket. Across the board, leasing is robust right now,” Mark says.

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Who's Buying SD Homes Office?

Has SD Homes sold its Mission Bay office building for social change? The San Diego Business Journal reports that an entity called JWJ Properties One purchased 2437 Morena Blvd, an 11,400 SF office building for $3M from the real estate services provider. A search of JWJ shows it is attached to Rescue SCG Executive Director Jeff Jordan. The company describes itself on its website as a marketing company that helps organizations looking to promote healthy lifestyle habits. Colliers International's Marc Posthumus repped SD Homes, while C.E. Sanders & Co's Craig Sanders repped the buyer, SDBJ reports.

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