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San Diego Office Vacancy Rises as New Supply Outpaces Absorption

1/21/16

Here’s a year-end review of San Diego’s office market from Colliers International. The report was prepared by the firm’s San Diego region Research Director, Christopher Reutz.

In San Diego, 2015 was the first year since 2009 where total new office construction (1.2 msf) exceeded the total amount of net absorption (1.0 msf). Vacancy ticked up slightly from 12.6% in Q3 to 12.8% in Q4. Negative net absorption of 71.9k sf along with 76.8k sf of construction completions caused the vacancy to move upward for a third consecutive quarter.

With less than 200k sf currently under construction and continued strong demand, vacancy rates should trend downward in 2016. Class A average asking rental rates countywide declined slightly (-$0.03/SF) to $3.14/SF/month in Q4 after having the single highest quarterly increase in the prior quarter.

Net Absorption

San Diego County office net absorption dipped in Q4 2015 at a recorded negative 71.9k sf. Combined with the prior three quarters, net absorption reached 1 msf for the entire year. This equated to the average annual net absorption over the last seven years.

Most of the annual demand occurred in Class A space (825.1k sf) with 27.7k sf posted in Q4. While Class B space suffered a 193.8k sf drop in net absorption during the quarter, the base still recorded an overall net gain in demand of 100.1k sf for the year. Class C space had the strongest demand with 94,183 SF absorbed during the quarter and 76k sf for the year.

Vacancy

Countywide vacancy increased slightly for a third consecutive quarter. The overall vacancy rate of 12.8% was comprised mostly of direct vacant space (12.0%) with minimal sublease space (0.7%). Vacancy continues to stay below prerecession levels. Before the recent recession began, overall vacancy floated in the 9-12% range for several years before standing at 14.0% at the end of 2007.

Demand since 2014 remains as strong – if not stronger – than the most of the years prior to the recession. This pace of demand will continue to be robust throughout 2016 and likely in 2017, placing downward pressure on vacancy.

New Supply

Construction activity exceeded 1.2 msf in 2015 and is at its highest level since 2009. More new construction was completed in 2015 than in the prior four years (2011-2014). With only 181.8k sf currently under construction, there is no concern for over-building as was the case prior to the recession that began in 2007. Unlike the previous expansion cycle when nearly 14 msf was built, San Diego has considerably less developable land.

A sizable proportion of the future office supply will come from ‘creative office’ renovations of industrial projects such as Cruzan’s 177.3k sf ‘MAKE’ office project in Carlsbad. Additionally, several projects are in the process of being converted or repurposed from industrial space to office space such as Atlas (232.6k sf) on Sea Otter Place in Carlsbad or The Yard (60.5k sf) on Oberlin Drive in Sorrento Mesa.





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