Pendulum Partners’ purchase of StoneCrest, a class-A office campus in the Kearny Mesa submarket of San Diego County, was one of the most notable sales transactions of Q2 in the market, demonstrating the region’s strength. | Courtesy Pendulum Partners

SD Office Leasing and Sales Nearly Double in Q2

Carrie Rossenfeld Office

The San Diego office market kicked back into gear during the second quarter, displaying robust leasing activity that almost doubled in volume from the previous quarter, as well as a healthy 233,866 square feet of positive net absorption, according to a report from Kidder Mathews. Sales activity in the market also nearly doubled in Q2 from the previous quarter.

Leasing activity jumped to almost a million more square feet in volume than the first quarter, posting 2.5 million square feet. San Diego’s net absorption for class-B office space at the end of the second quarter was approximately 242,973 square feet, which had the most impact on absorption for the office market, Kidder Mathews reports. Class-A office space also displayed positive net absorption at 32,973 square feet.

In a rare turn of events, according to Kidder Mathews, tenants favored class-A office space in the second quarter. Class-B space usually leads the way for most demand but fell short by approximately 200,000 square feet in volume at 1 million square feet, as opposed to class-A space at 1.3 million square feet.

Asking office rents remained the same rate from the previous quarter at $2.72 per square foot, and vacancy rates dipped to 10.3 percent, both a post-recession record high and low, respectively, Kidder Mathews reports. Asking lease rates for class A averaged an all-time record high of $3.26 per square foot on a full-service basis across the San Diego market, while similarly, lease rates for class B averaged a post-recession record high of $2.50 per square foot on a full-service basis.

Office vacancy hit a post-recession low of 10.3 percent, down from Q1’s 10.6 percent. Submarkets in San Diego with the highest vacancy rates include Carlsbad at 19.5 percent and Vista at 17.8 percent. As fundamentals are steady and new spec supply is limited, with an even tighter vacancy rate, landlords may still have even further runway for growth in terms of asking rental rates, Kidder Mathews says.

The report goes on to say that office tenants continue to remain focused on value, looking for real estate opportunities to increase employee engagement, provide access to amenities, and positively impact employee recruitment. The San Diego office market fundamentals are well positioned, in these focuses, to capture demand from the maturing millennials that continue to drive a sizeable portion of the local economy, largely in the startup as well as the tech industries.

The trend toward creative-office space is in full swing in San Diego County, as many of the properties under construction are loaded with innovative amenities, expansive office space, and a way to make employees feel more “at home” rather than the usual grind, which all reflect the needs of the present time modern workforce, Kidder Mathews says. Overall, office fundamentals are solid and holding steady as we continue into the second half 2018.

Overall employment growth continues its positive streak, as the San Diego County unemployment rate fell to 2.9 percent, hitting the lowest level in 18 years, Kidder Mathews reports. This is below the year-ago estimate of 3.7 percent and well below the unadjusted unemployment rate of 3.7 percent for California, as well as the rate of 3.6 percent for the nation. According to the State of California’s Employment Development Department, San Diego County’s total nonfarm employment increased by a better-than-average 32,500 jobs year over year between May 2017 and May 2018. Kidder Mathews says San Diego proves to be a resilient local economy and will continue to provide ample demand for the market in the coming quarters.