The coastal markets in San Diego — La Jolla, Pacific Beach, Torrey Pines, Del Mar, Solana Beach, Cardiff, Encinitas, and Carlsbad Village — have always been desirable for office investors and tenants, but this segment was a bit sluggish in both sales and leasing activity in Q1. However, according to a report released by a representative of JLL, Q2 was a different story.
The report says the coastal submarket saw $59.6 million in office sales during the second quarter, including the sale of a property being repositioned as The Bungalows at Del Mar to Harbor Associates, which partnered with Bascom for the $15.7 million purchase (translating to $406 per square foot).
“As expected, we continue to see owners utilize on- and off-market sales techniques to achieve strong pricing on long held assets that are ripe for repositioning,” the report says. “The table is set for a strong second half of the year, with several transactions already under contract and several more in the wings preparing for a September launch.”
Leasing fundamentals also improved in Q2, according to the report, with coastal office properties seeing 17,687 square feet of positive absorption during the quarter. This momentum follows three consecutive quarters of low negative absorption, the report says, adding that occupancy in this submarket has reached 92.6 percent.
To be clear, the positive absorption that this region experienced during Q2 was mostly due to the repositioning of class-B buildings; the report says that class-A office buildings “remain less attractive to tenants.”
The JLL report indicates that this trend of positive absorption may reverse itself during the rest of the year with rents for class-B buildings still on the rise, but rental-rate velocity could be mitigated by the high amount of product set to be repositioned and delivered during the year. The report says, “In our opinion, the demand is there and the product is finally being delivered, with some owners repositioning assets into a more creative environment geared towards younger users.”