San Diego’s Strong Office Market Sparks Spec Development
The San Diego office market is emerging from a slump in new office supply, with delivery of 105,635 SF at the end of Q1 2017, according to a new report from Colliers International.
New deliveries include Kilroy Realty’s 96,435 SF Eastgate UTC, a 9,200 SF office building on Harbor Drive in the Old Town/Sports Arena/Point Loma submarket and seven buildings with nearly 400K SF under construction.
“Leasing has been strong over the last year and a half, but not much has been built,” Colliers first vice president Derek Applbaum said. “Last year, in fact, was the slowest development year in four years, significantly lower than the average annual 1.1M SF.”
Lack of new supply boosted rents, Applbaum said, and all but one project under construction — a 30,632 SF build-to-suit for Global One Ventures in Carlsbad — are being developed on spec.
“Strong leasing over the last year triggered spec development,” he said.
A total of 466,455 SF was absorbed in 2016, despite tenants, particularly in downtown San Diego, shedding excess space and right-sizing their footprints.
Political and economic uncertainty helped to slow transactional activity in Q1 2017. Barring emergence of recessionary dynamics, San Diego has healthy market fundamentals, including exceptional job growth, decreased unemployment and business expansion. The office market is likely to achieve positive demand and a continued decrease in vacancy, the report predicted.
San Diego’s unemployment rate dropped from 4.5% in January to 4.2% in February, according to a California Employment Development Department report, down from 4.8% a year ago. After adjusting for seasonal variation, the rate was 4.1%. The declining unemployment rate reflects the strength of the region’s local labor market, with employers creating 6,600 new jobs in the first two months of the year, while 26,700 jobs were added over the last 12 months.
Downtown led the county in positive net absorption in the first quarter, according to JLL’s Q1 2017 report, with 300K SF absorbed. A big gain in occupancy was primarily due to the city taking 315K SF in the Sempra headquarters building at 101 Ash St. This building, which represented the largest block of available office space in the downtown market, has been vacant since Sempra relocated to its new headquarters in the East Village neighborhood in 2015.
Even with rising rents and tenants seeking greater efficiencies, Applbaum said downtown office vacancy has dropped over the last couple of years from 2M SF to 1.5M SF, or 15% overall (direct and indirect) vacancy. Other markets experiencing significant absorption were Kearny Mesa, with more than 127K SF leased, and Carlsbad, where about 61K SF was absorbed.
Vacancy countywide dropped to 11.4% in Q4 2016 and has remained steady through the first quarter of 2017, with overall average asking rental rates for all classes escalating to $2.59/SF per month, the highest achieved rate in the last eight years, and $3.18/SF per month for Class-A space.
Of the nearly 732K SF of office space under construction or in the pipeline, 192,272 SF will be delivered in 2017, Applbaum said. That includes The Irvine Co.’s 96K SF Eastgate Terrace, a three-story, amenity-oriented, campus-style project at 9779 Towne Centre Drive in the UTC submarket, which will be ready for occupancy within the next few weeks. He said Kilroy will also break ground this year on the 280K SF office component at One Paseo, a 1.4M SF, $750M mixed-use development in Carmel Valley, which is also a spec project.
Casey Brown is repositioning and rebranding the old San Diego Union-Tribune building in Mission Valley as AMP&RSAND, a modern, 330K SF office space. Applbaum said Mission Valley has traditionally been a mom-and-pop market, but with large floor plates, an amenitized on-site environment and all the amenities of Fashion Valley Mall within walking distance, large employers who want to attract young talent may be attracted to this project.
