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November 17, 2018
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Office Market Continues on Solid Ground for San Diego

10/16/18

This report was provided to us by the San Diego office of real estate services firm Cushman & Wakefield.

Cushman & Wakefield’s newly released office market report for San Diego showed overall market fundamentals remain on solid ground in the desirable Southern California coastal region. Office occupancy grew another 244k sf across all classes, bringing year-to-date net absorption to over 585k sf. After a slow start to the year, the past two quarters have now averaged approximately 260k sf of growth—which based on anticipated office job growth for 2018 is also more along the firm’s expected absorption path for this year. On the flip side, vacancy did report its first quarterly increase in more than two years but there was a good and expected explanation for that.

“San Diego’s office vacancy ended the third quarter of 2018 at 13.4%, an increase of 80 basis points (bps) from midyear but still 30 bps below a year ago,” commented Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego. “This upward shift ended the county’s streak of nine consecutive quarters of decreasing office vacancy but was largely the result of unoccupied new construction—some of which, however, already has future commitments in place. She noted, “Further adding to the positive side of the equation, the third quarter marked the 17th consecutive quarter of occupancy growth during which tenants have now absorbed 6.5 msf combined across all classes.”

Exploring the critical topic of new construction further, Campion noted, “Overall, a number of deliveries led to a total of 412.3k sf of new project completions in the third quarter, none larger than AMP&RSAND, a newly renovated 339k sf project at the former San Diego Union-Tribune buildings. Next year, Encore Capital is scheduled to occupy 96k sf in the project. Makers Quarter – Block D also delivered this quarter in Downtown, in which coworking firm Spaces signed a lease for three floors, while marketing agency Basic will take one floor, leaving just a single floor remaining at the East Village project.”

Another major construction headline in the third quarter was Manchester Pacific Gateway breaking ground in August, beginning with a new 372k sf office tower for the U.S. Navy. In total, this new project plans to deliver more than 1 msf of Class A office space across a mixed-use campus environment that is also serviced by additional retail and restaurant space and hotel.

Brian Starck, Managing Director with Cushman & Wakefield’s San Diego office, said, “Of the total 1.6 msf of office product currently under construction countywide, 53% is already accounted for. While we anticipate continued pre-leasing activity, as forecasted this quarter, this will likely continue to result in modest short-term upticks in vacancy as these projects come online ahead—the remainder of 2018 is slated to bring 659k sf of new deliveries. That said, continued economic and job growth in combination with increasing tenant demand should maintain occupancy (and rent growth) the rest of this year and into at least the following.”

“And while we are a bit off the net absorption pace set in the most recent robust years from 2014 through 2017 (which averaged 1.5 msf of annual growth),” Starck added, “if we in fact see another solid level of growth in the fourth quarter, 2018 would still prove to be another successful year.”

Cushman & Wakefield’s third quarter 2018 report also showed the overall average asking rent across all office space in San Diego inched up by another penny to $3.03 psf per month on a full service basis. Notably, the first quarter of 2018 had represented the first time the overall average rate had exceeded the $3.00 psf mark since the firm began tracking data for this market in 2003. Starck added, “Composed heavily of Class A space, new construction continues to influence rents for the most part. Over the past 12 months, Class A average rents have increased by 5.2% to $3.47 psf overall. And there is still room for growth guided by the amount of new construction.”

Another office related sector C&W explored during the third quarter was San Diego’s tech market, as the firm published a new report entitled Tech Cities 2.0, featuring the region among the key tech markets in North America.

“Currently tech company employment accounts for more than 8% of San Diego’s total employment, ranking it 9th in the U.S. based on such percentage per the Bureau of Labor Statistics—though this figure is likely much higher if you consider all the other industries utilizing or relying heavily on technology nowadays,” said Dan Broderick, Cushman & Wakefield’s Regional Managing Principal for the Southwest & Mexico. “From January 2017 through August 2018, tech tenants have leased nearly 3 msf of space across San Diego’s office and industrial sectors. Even though the growth of tech companies has pushed the average rent 31% since 2010, we find rents are still more competitive compared to other major tech markets.”

Broderick stated, “San Diego’s tech economy is anchored by the life science ecosystem around UCSD in Torrey Pines and the telecommunications companies clustering around Qualcomm in Sorrento Mesa. While Qualcomm recently reduced its local footprint, companies such as Illumina, Viasat and Nuvasive continue to expand their presence in the region.”

He noted, “San Diego’s research institutions account for $4.6 bil in the local economy and are the core of the region’s $14.4 bil scientific R&D cluster. San Diego also has the second-highest concentration of science and engineering professionals in the U.S. and has attracted $11.8 bil in venture capital in the last 10 years ($6.8 bil invested in healthcare/life sciences/medical devices). The most recent second quarter saw robust venture capital funding with over $590 mil in San Diego according to PricewaterhouseCoopers. Healthcare/biotech received the lion’s share across all funding categories last quarter, while an AI software and an agtech company were also among the top 10 funded companies.”




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