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Asking Lease Rates Reach Record High In San Diego’s Office Market

San Diego County CA— According to CBRE’s research, the asking lease rates for the San Diego office market office continued to climb to a new historical record high of $2.73 Full Service Gross (FSG). Several large move-outs in Central San Diego resulted in negative net absorption for the quarter and a slight increase in vacancy. Overall, fundamentals in the San Diego office market remain strong as year-to-date net absorption surpassed total net absorption for 2015 and overall vacancy remained near pre-recession levels.

The asking rate increased 2.6 percent quarter-over-quarter and increased 9.2 percent year-over-year to $2.73.  Average asking rates decreased year-over-year in six of the 28 office submarkets, showing this theme is affecting the majority of the market. Class A rates increased 9.7 percent year-over-year, the largest increase of all classes.

Overall vacancy increased 20 basis points (bps) quarter-over-quarter to 12.6 percent. Driven by the negative net absorption, vacancy in Central San Diego jumped 70 bps quarter-over-quarter to 12.4 percent; Qualcomm’s move-out accounted for 25.2 percent of the negative net absorption.  Despite a slight increase in vacancy year-over-year, rents in Class A and B buildings continued to push upward across the San Diego office market. Landlords have continued their efforts to improve and amenitize buildings with the addition of common areas and features to take advantage of outdoor space, therefore justifying higher rents.

“In the absence of new development across the county, rehabilitated and repositioned assets are seeing the greatest activity and increased rental growth”, said Matt Carlson, senior vice president of CBRE in the San Diego region. “The former Union-Tribune printing facility in Mission Valley, which was recently bought by The Casey Brown Company is a prime example of repositioning, the property will be one of the most premier Class A office campuses in Southern Californian.”

Net absorption this quarter in the San Diego office market was negative (119,401) square feet, the lowest since Q4 2010.  Central San Diego experienced the largest hit with (283,862) square feet of negative net absorption, primarily driven by the Union Tribune and Qualcomm. The Union Tribune vacated 158,569 square feet of office space in Mission Valley as a result of their move downtown. After signing their downtown lease in Q4 2015, Casey Brown Company purchased the Mission Valley facility and it is now on the market for lease. Qualcomm vacated four buildings totaling 247,577 square feet in Del Mar Heights, Sorrento Mesa and UTC.

Notable leases this quarter include Scripps Health, Guild Mortgage Company, UC San Diego and Curology.

Eastgate Summit, a 64,832-square-foot Class B spec office building in UTC was the only construction delivery this quarter and remained fully vacant upon delivery. There remains 228,811 square feet of office space under construction, with 91.1percent located in Central San Diego. Construction in Central San Diego includes Eastgate Terrace, a 96,435-square-foot Class A building in UTC which broke ground this quarter and Torrey Point, a two-building Class A project in Del Mar Heights totaling 92,018 square feet.

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