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September 30, 2023
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San Diego Office Leasing Activity Fell to Lowest Level in 15 Years

4/14/23

MARKET HIGHLIGHTS

Leasing volume fell over 50% YOY to 1.1 msf.
Rental rates dropped QOQ and YOY to $3.04/SF on a full-service basis.
Average sale price per square feet dipped to a five-year low of $227/SF.


MARKET DRIVERS

Leasing activity fell to its lowest level in over 15 years, recording lower than 350 deals across the county and dropping over 50% YOY in volume, posting at 1.1 msf. Sublet space has hit a historic high of almost 3 msf, driving availability rates to a record high of 19.1%.

Although rents have steadily increased in recent years, even as other fundamentals have somewhat weakened, Q1 noted a slight decrease QOQ and YOY. Class A and Class B rents have fallen accordingly, although Class C held steady from the end of 2022. When compared to the national average, local rent growth is still outperforming.

Higher interest rates and economic uncertainty have resulted in a decrease in sales volume the past couple quarters. Prices have, in turn, softened to respond to the slowdown in activity. Q1 posted an average sales price of $227/SF, a 10-year record low on an annual basis.

ECONOMIC OVERVIEW

The San Diego County unemployment rate in February was 3.7%, below the year-ago estimate of 4.1%, back to pre-pandemic levels. This compares with an unadjusted unemployment rate of 4.8% for California and 3.9% for the nation during the same period. Although the percentage rate remains unchanged when compared month-over-month from January, the market added 7,800 jobs within that period.

The impact of the cooling in the economy can be felt in the San Diego office market, as demand slows, and vacancies and availabilities continue to hover at record highs. Layoffs have been rising in the start of the new year across the nation and many local firms have announced layoffs in the recent months.


NEAR TERM OUTLOOK

The San Diego office market has been battling to find its footing since the pandemic first hit, mirroring the national retrenchment in office markets across the country. As firms continue to lay off employees amidst the cooled economy, the office market will experience less leasing activity and smaller requirements in the coming year as companies downsize.

Amid rising interest rates and uncertainty surrounding the recession, buyers have shown more caution in their investments. It is expected that investment activity will slow, and pricing is anticipated to soften as cap rates rise to compensate for the high cost of debt.


This report was prepared by Kidder Mathews Director of Research, Gary Baragona, Sources: CoStar, EDD, SDBJ, SD Union-Tribune





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