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4/15/16
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Colliers International has provided this first quarter 2016 review of San Diego County’s office market. The report was prepared by Christopher Reutz, Colliers International, Research Director | San Diego Region
Key Takeaways
• Office demand will favor more speculative office development with many slated to break ground in 2016 and 2017.
• Positive net absorption of more than 460k sf outpaced construction causing vacancy rates to drop to 12.4% after three consecutive quarters of increasing rates.
• With less than 200k sf currently under construction and continued strong demand, vacancy rates should continue to decline in 2016.
• Overall average asking rental rates countywide declined slightly (-$0.01/SF) to $2.44/SF/month in Q1. This is the first quarterover-quarter decrease in four years.
Net Absorption
San Diego County office net absorption picked up totaling 466.5k sf during the first quarter of 2016 after a slowdown at the end of 2015. Most submarkets benefited from the uptick in demand but most notably in Kearny Mesa (122.8k sf), Rancho Bernardo (99.9k sf) and Carmel Valley (87.5k sf).
Most positive demand occurred in Class B space with 246.6k sf posted in Q1. Class A and Class C demand each ended up with positive net absorption of 148.7k sf and 71.2k sf, respectively.
Vacancy
Countywide vacancy dipped 42 basis points (BPS) during the quarter to stand at 12.4%, which is down from 12.8% in the previous quarter. The vacancy rate was comprised mostly of direct vacant space (11.8%) with minimal sublease space (0.6%).
Vacancy rates are strong even amongst the different class types with Class A standing at 13.5% and Class B at 12.5%. Class C vacancy of 9.7% in Q1 is the first time in eight years when it posted below 10% (9.9% in Q4 2008).
New Supply
There was minimal construction activity during Q1 with only 65.5k sf completed. This is solely attributed to the completion of Building 11 in the ViaSat Headquarters in Carlsbad on Gateway Road. Additionally, another 181.8k sf is under construction. With little new inventory currently under construction, there continues to be no concern for over-building as was the case prior to the recession.
It is likely some large speculative projects will break ground this year or next including the 630k sf five-building Aperture Del Mar in Carmel Valley, the 583k sf second and third phases of Centrumplace in Kearny Mesa and the 318k sf two-building Millenia office project in Chula Vista. Overall, there is approximately 12.5 msf of proposed future development.
Trend Forecast
As the millennial workforce drives many new startups, there is growing demand for ‘co-work’ space. This creates opportunities for traditional, large blocks of space to appeal to and accommodate multiple startup tech firms. Downtown and various core suburban submarkets are key locations for ‘co-work’ space. Additionally, ‘creative office’ renovations will continue as older flex and office buildings are transformed for the needs various office and tech users.
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