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Record Deliveries Fueled By Confidence In San Diego’s Office Market

San Diego County CA— According to CBRE’s research, San Diego saw the highest amount of office construction activity since 2008, indicating confidence in the market.

Office construction activity was robust in 2015 with a total of 815,871 square feet delivered. This is the highest annual square footage delivered since 2008. In 2015, deliveries were comprised of 51.3 percent speculative development and 48.7 percent build-to-suit.

With an influx of construction activity in 2015, net absorption lagged construction deliveries, resulting in increased vacancy to 13.5 percent. Class A vacancy dropped 40 basis points (bps) quarter-over-quarter to 13.1 percent, while Class B increased 60 bps to 14.9 percent.

“Exciting times are ahead for San Diego office building owners,” said Chris Pascale, senior vice president for CBRE in the San Diego region. “Rental rates are at or have surpassed pre-recession highs, vacancy rates are back in check, and supply/demand metrics are favorable. New, speculative construction is occurring again in several submarkets, with new product and the corresponding replacement cost rents being well received by prospective tenants. Growth in the technology and life science sectors will continue to fuel demand and absorption in central San Diego.”

After historically high office sales in Q3 2015, sales activity tapered off to $150 million this quarter; the smallest volume of any quarter in 2015. Despite a slow quarter, sales activity was robust in 2015 with annual sales volume of $2.5 billion. This is the highest annual sales figure since 2007.

Average asking lease rates closed 2015 at $2.68, surpassing the pre-recession peak of $2.62 seen in Q2 2008. Del Mar Heights holds the highest average asking rate of $4.25. Rate increases occurred across all classes; Sorrento Valley saw the largest increase quarter-over-quarter of 19.3 percent. As new Class A office product is delivered, asking rates are expected to continue their upward trajectory.

This quarter, the San Diego office market posted 35,908 square feet of negative net absorption. Although several new deals occurred, a few large move-outs (Qualcomm and Petco) negated the positive activity. While Class B experienced 255,288 square feet of negative net absorption, Class A posted 191,700 square feet of positive net absorption. This shows that demand persists for Class A space even with the consistent increases in asking rates. Despite a setback this quarter, year-to-date net absorption was positive 555,316 square feet.

Although no new projects broke ground, The Heights at Del Mar was completed this quarter. The project delivered a 74,895-square foot, Class A office space, which is 100 percent vacant. This is the third building at this campus.

One notable project in the pipeline for 2016 is a build-to-suit for Vertex in Torrey Pines. Two buildings will be demolished to make way for a new 170,523-square-foot building with plans for a second adjacent building in the future. The new headquarters will accommodate 250 employees, signifying plans to grow their current workforce of 180.

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