San Diego’s Kearny Mesa submarket saw a vacancy decrease in Q1 due a number of large tenants signing new leases in the market, according to Nick Bonner, first VP of CBRE in San Diego in a report from the firm. Tenants include UCSD, Cobham, American Medical Response, and Entercom.
“We also saw a high percentage of existing tenants renewing and expanding,” Bonner says. “Asking rates in Kearny Mesa are expected to continue to increase in the future because of limited space in nearly every size segment, upgrades to existing buildings, and the markets strong fundamentals. Kearny Mesa is sure to get more attention from investors and developers in light of the new community plan that will allow more flexibility and higher density for land uses.”
According to CBRE’s research, the San Diego office market continued to demonstrate mostly positive fundamentals throughout the start of 2018 and saw improved vacancy and higher asking lease rates in Q1 2018. The average asking lease rate for office space in San Diego increased $0.02 (+0.7 percent) in Q1 after a slight decrease at the end of 2017. The rate is $0.10 (+3.8 percent) higher year-over-year and surpassed the all-time high reached in Q3 2017. The largest rate increase was in class-A product, which was up $0.12 (+3.7 percent) year-over-year. Class-B asking rates increased $0.07 (+2.5 percent) year-over-year, and class-C rates increased $0.08 (+3.8 percent). Class-A availability fell 90 basis points (bps) quarter-over quarter while the asking rate went up $0.03, partially a result of lower-priced class-A space getting leased.
Overall vacancy in the San Diego office market fell 10 bps quarter-over-quarter and year-over-year to 11.2 percent, CBRE reports. Both class-A and class-B vacancy rates were relatively stable the past few quarters. Kearny Mesa and Downtown showed the largest year-over-year decreases in vacancy with -480 bps and -330 bps, respectively.
CBRE also reports that net absorption was negative for the second consecutive quarter with -53,220 square feet, improved from Q4 2017 but much lower than Q1 2017. Typically, when vacancy decreases there is also positive net absorption; however, four office buildings transitioned to owner/user this quarter and another was demolished, which means any vacancy no longer gets calculated in the statistical set.
According to CBRE’s report, there were eleven deals over 20,000 square feet completed in Q1 2018, the same as Q4 2017. The leases were evenly spread across most of the major submarkets, with Carlsbad seeing three of the deals and UTC and Scripps Ranch seeing two each. Notable deals included Pacific Union Financial in UTC, Plum Healthcare, and Avanti Workspace in Carlsbad; General Atomics in Rancho Bernardo; and PayLease (an expansion/renewal) in Sorrento Mesa.
No new office product delivered in Q1 2018, the report says; however, 613,458 square feet was under construction, the most construction activity since Q2 2015. A new office campus in Carlsbad broke ground on Town Garden Road, which consists of 280,000 square of Class A office among three buildings, with two additional buildings also proposed. Additional projects under construction are The Watermark (mostly leased to MedImpact), 1800 Aston and Makers Quarter Block D. The overall lack of new construction continued in many desirable submarkets, despite limited availability of quality space.