Insight

San Diego's Office Landscape Is Changing

San Diego's core commercial office markets continue to tighten. In 2014, under 1 million square feet was added while over 1.2 million square feet was absorbed.

February 11, 2015


By Don Mitchell, Managing Principal, Cresa San Diego

In 2014, construction commenced on the first speculative high rise office project since Hines’ La Jolla Commons I in 2008.  In 2015, on the heels of the adjacent 415,000 square foot build-to-suit for LPL, the Irvine Company will deliver a 306,000 square foot, Class A development known as One La Jolla Center in UTC, San Diego’s central office market.  This is a sign of a strengthening market as developers, equity partners, and lenders believe the benefit outweighs the risk of speculative development.  Sorrento Mesa accounted for 410,000 square feet of new office space in 2014, located at 10001 Pacific Heights Boulevard, but it was pre-committed to by owner/user, Qualcomm. 

At year end, the overall vacancy rate for the core markets in three San Diego regions (Downtown, Central and North County) was reduced to 11.5 percent, indicating a tight market for users.  Rent spikes can be anticipated when vacancy rates shrink to single digits.  Expect that to occur in 2015 in submarkets including the Uptown area (5.5 percent), Poway (5.4 percent), Rancho Bernardo (6.8 percent), North Beach Cities (5.7 percent), Torrey Pines (8.0 percent), Sorrento Mesa (9.9 percent), and Kearny Mesa (9.8 percent).  

Submarkets yet to benefit from the recovering economy include Downtown (14.8 percent), Scripps Ranch (17.4 percent), Governor Park (17.8 percent), UTC (17.0 percent), Del Mar Heights (14.0 percent), Carlsbad (14.7 percent), Oceanside (14.1 percent), and Vista (18.1 percent). However, these vacancies have dropped consistently and are expected to decrease further in 2015. 

Class B product represents the softest pocket with a 13.9 percent vacancy. Downtown, Class B vacancy sits at 21.8 percent and all north county submarkets blended are at a 17.6 percent vacancy.  Companies looking for well maintained and centrally located space will have opportunities in the Class B office markets in 2015, while businesses looking for high end, Class A space will pay the price. Class A vacancies for central markets are between 5.7 percent to 7.7 percent and dropping.  Businesses that moved to Class A office space when the rates were near rock bottom will have to evaluate paying the historically higher rates or relocate back to the Class B projects.  It will be interesting to see if a substantial shift occurs in the Class A and Class B vacancies as the year progresses.         


Space Use Conversions Affecting the Market

Over the last few years we have seen a market response to the changing work environment. With business culture now focused on collaboration, employee retention, efficiencies in travel time, and a new workforce generation, landlords are converting standard office space and traditional industrial space to accommodate this new culture.  The resulting success due to the pent up demand has been promising for landlords, but there are some concerns. These modified facilities require costly on-site amenities and services, more expensive tenant improvements, and risk the longevity of a demand that may be trendy.   Also, copy cats are more the rule than the exception, so over time we expect to see a large supply of these opportunities and a softening of current rents.  One issue surfacing is the amount of parking available to businesses occupying converted industrial space where they’ve traditionally had parking ratios that are one-half the ratio required by office businesses.  While there is a hope that short commutes or public transportation will ease the need to drive to work, we don’t think the mindset of driving to work will change to any great degree in the short run.

Don Mitchell, Managing Principal at Cresa in San Diego, has spent over 30 years in the brokerage business. Cresa is the world’s largest corporate real estate advisory firm that exclusively represents tenants. The firm provides services in 40 countries and more than 173 locations, including 58 North American Cresa locations.  For more information, visit www.cresa.com.