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Strong Office Absorption Drives Record Low Vacancy Rate in San Diego

San Diego County CA— According to CBRE’s research, the San Diego office market improved as overall vacancy fell to 12.5 percent, a new post-recession low. This improvement was driven by more than 660,000 sq. ft. of positive net absorption this quarter, which exceeded total net absorption in all of 2015. In central coastal submarkets, record rents were achieved, signifying declining supply amid continued demand for space.

Sales activity was strong in the first quarter with $648.5 million in volume according to RCA, greater than both Q4 2015 ($513.5 million) and Q1 2015 ($377.8 million). The $262.3 million sale of the Intuit Campus along the 56 Corridor, totaling 465,812 sq. ft., accounted for more than 40 percent of sales volume this quarter. Two downtown towers also traded; 525 B Street was purchased by LaSalle Investment for $122 million and 530 B Street was purchased by Bosa Development for $53.2 million.

The market for Class A office space continued to tighten, driving demand for Class B product. In Q4 2015, most of the positive activity came from Class A, however this quarter, there was more activity among Class B product, which accounted for 59.9 percent of the overall net absorption.

“The San Diego office market is healthier than it has been in years, with nearly every Class A and Class B submarket in the county being at, or near, peak historical rents,” said Jeff Oesterblad, vice president of CBRE in the San Diego region. “The Class A arena continues to perform well, but the spotlight shined brightly on the Class B market during the first quarter, notching nearly twice the net absorption as its Class A counterpart. The Class B sector will likely narrow the rent gap between the Class A sector, and is expected to perform well for the remainder of the year, as Class B projects continue to be re-positioned and amentitzed. Leasing activity should remain strong for the rest of the year given the current demand in the market and the strengthening economy that persists.”

This quarter, asking rates increased across all classes and were up 10.2 percent year over year, resulting in the sixth consecutive quarter that rates have increased. Del Mar Heights (DMH) continued to command the highest asking rate of $4.20 per sq. ft. full service growth (FSG); more than 55 percent of the available buildings in DMH had asking rates of $4.00 per sq. ft. or higher.

Overall vacancy fell to 12.5 percent this quarter, the lowest rate since Q3 2006. The largest decrease in vacancy occurred among Class B product, the rate improved120 basis points (bps) quarter over quarter to 13.5 percent. Net absorption in the San Diego office Market was 660,834 sq. ft. this quarter, the largest quarterly net absorption figure in more than a year. Notably, the positive net absorption this quarter surpassed annual net absorption for all of 2015 by nearly 20,000 sq. ft. Central San Diego accounted for 77.6 percent of net absorption, driven by Dexcom in Sorrento Mesa, Jones Day and Dentons in UTC, Lifewave in Scripps Ranch, and the County of San Diego in Kearny Mesa.

There were no deliveries or new construction activity this quarter, however there are262,908 sq. ft. of office space currently under construction. The majority of this construction is in Central San Diego, most notably, Eastgate Summit in UTC (64,832 sq. ft.) and Torrey Pointe in Del Mar Heights (92,018 sq. ft.). Spec buildings compose 75 percent of office construction activity, signifying confidence in the future of the market. In Sorrento Mesa, three R&D buildings at 5889, 5893 and 5897 Oberlin Drive were reclassified to Class B office, adding 62,700 sq. ft. to the office inventory. In an effort to attract tenants and compete with more progressive buildings in the market, landlords see older obsolete or opportunistic industrial buildings as the perfect canvas for the type of open collaborative office space many tenants are beginning to expect.

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