San Diego’s major economic drivers—defense, biotech, maritime and tourism—are booming, which is pushing up demand for office space. With soaring demand and low vacancy, both Class-A and B office properties are seeing rents rise to record levels in some submarkets, particularly University Towne Center (UTC), Delmar Heights and Downtown, according to experts at our San Diego State of the Market event last week.
Casey Brown Co founder Casey Brown (right, with Cypress Office Properties principal Mark Wayne, left, and Allen Matkins' Rick Miltimore) said in the last couple of months of 2015, office rents broke the $3/SF rent ceiling, with some projects in the UTC and Delmar Heights submarkets cracking $4/SF. Casey said some owners are even dropping free rent from six months to three months. He noted UTC and Downtown are popular because they are the region’s two most walkable urban markets, but it’s nearly impossible for users of 10k SF and up to find space.
Mark expects rent growth to taper off a little in 2016, but continue to grow. “The key driver is lack of large blocks of space. I don’t think we’ll see 10% annual growth like in the last few years, but it won’t have a negative impact on vacancy, because property developed in the last cycle has been absorbed or sold to users," he said.
Additionally, increasing rents in high-quality, high-priced submarkets are causing users to move to less expensive areas. “If you’re a tenant at a UTC building with rent at $2.25 P/SF and its going up to $3.50 P/SF, you’re probably looking for a space that’s been upgraded to some recent vintage in a comparable type of environment, but located in an area with lower rents,” Mark said. “So I think we will see a shift to more Class-B projects.” He said most users are looking for a creative environment, and more than half of all office transactions done last year were for creative office space.
Casey is betting Mission Valley, which is in the center of SD County, is the next big "go-to" submarket for creative users looking for less expensive space. His company recently acquired the five-story Union Tribune office building (pictured) and print shop in Mission Valley and is renovating them to creative space.
“The work environment is evolving in front of us,” Mark said, noting that 3.6 million Baby Boomers are retiring this year and the management workforce is growing by 25% in Millennials. He said employers want space that inspires and connects people.
Marks added it's not just the 30 and under folks; everyone today—law firms, management companies and real estate firms—wants creative space, with the roll up doors, exposed ceilings and ping pong tables. Casey also pointed out owners must be engaged in managing assets to ensure tenant retention by providing good service and proper maintenance of facilities, including outdoor amenities.
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