Industry research from several large brokerage firms shows that San Diego had especially strong office-leasing fundamentals during Q2.
Office asking rates increased $0.03 (+1.0 percent) quarter over quarter to $2.95, the highest asking rate on record for San Diego County, according to a report from CBRE. The rate increased for the sixth consecutive year, up $0.11 (+3.9 percent) from Q2 2017.
Asking rents for class-A office space have been climbing due to limited supply mixed with strong demand; they increased 3.1 percent to $3.38, CBRE says. Class-B rates grew 4 percent as landlords add amenities to compete. Asking rents were higher year over year in all major submarkets, and five of those (Del Mar Heights, Mission Valley, Sorrento Mesa, Downtown, and Carlsbad) reached or surpassed previous peaks.
In addition, CBRE reports that San Diego office absorption surpassed 500,000 square feet, and vacancy dropped to a post-recession low of 10.6 percent. There was a large volume of sizeable deals, with total leasing activity reaching almost 2.3 million square feet, the most since Q4 2016. A few of the large deals that triggered positive absorption were downsizes, from R&D spaces and into office; therefore, they will hit the industrial market as vacant instead of office, the firm says.
“The San Diego office market remains strong as it continues to experience positive net absorption,” says Christopher Pascale, SVP of CBRE in San Diego. “Due to the lack of new construction and strong office job growth, we are seeing record asking rates across the board, with most submarkets surpassing pre-recession highs.”
Pascale adds that, unsurprisingly, defense has dominated the absorption year to date, particularly in the I-15 Corridor. “The projects that are succeeding are the ones with the best amenity package — food, fitness, recreation, outdoor spaces, services, and so forth. These are the projects that are seeing the highest lease rates.”
JLL reports that cybersecurity and aerospace/defense companies are major economic drivers in San Diego, signing approximately 1.5 million square feet of office space since 2015. Large-block companies in expansion mode are mostly staying close to their current submarket locations, the firm says.
Also, according to a report by Cushman & Wakefield (C&W), countywide office vacancy shed another 30 basis points (bps) quarter over quarter during Q2, closing midyear 2018 at 12.6 percent, its lowest level since the third quarter of 2006 (12.4 percent). Through the first half of 2018, San Diego has accumulated 342,000 square feet of positive net absorption, comparable to its 370,000 square-foot average for the same six-month period during the previous five years (2012 to 2017).
“After beginning 2018 with minimal, albeit positive, occupancy growth of just 65,500 square feet, the second quarter saw a much-improved four-fold increase posting 276,400 square feet of growth,” says Jolanta Campion, C&W’s research director in San Diego. “The second quarter of 2018 proved to be San Diego’s best second-quarter performance in the last five years (since Q2 2013) in terms of occupancy growth figures. Furthermore, it also represented the 16th consecutive quarter of occupancy gains.”
C&W’s report did indicate occupancy growth was somewhat disproportionate by sub-county during the second quarter. Tenants absorbed a total of 252,000 square feet on a net basis across Central County and 71,000 square feet in South County; however, they returned a net of 46,600 square feet in North County. As of midyear 2018, overall vacancy was lowest in South County (10 percent) followed by Central County (12.6 percent) and North County (17.1 percent).