Year Pacing as Strongest in Over a Decade
Quarterly Gains Driven by Big Occupants
San Diego County CA— Following a tempered yet positive second quarter, San Diego’s office market regained its robust momentum in the third quarter spurred by some large corporate users according to Cushman & Wakefield’s latest Q3 2017 office market snapshot. The region’s office market achieved 716,600 square feet (sf) of positive net absorption, bringing total year-to-date occupancy growth to nearly 1.3 million sf (msf). That figure equates to an average of 423,000 sf of growth per quarter.
“We experienced the highest level of positive net absorption through the first three quarters of any year since 2005’s 1.4 msf of absorption,” said Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego. “Likewise, pacing just ahead of last year’s strong annual level, at this rate 2017 could achieve its highest annual growth since 2005’s booming 1.9 msf. While not entirely surprising, this is still a significant feat given just how far we are in the current market cycle.”
She added, “The third quarter represented the 13th consecutive quarter of positive absorption for San Diego’s office market.”
According to Brett Ward, Leed AP, Managing Director of Cushman & Wakefield’s Office Division in San Diego, “Occupancy growth in the third quarter was heavily driven by a handful of large corporate users. Illumina occupied the newly delivered 316,300-sf i3 project in Eastgate, and Renovate America took occupancy of a newly renovated 161,000-sf building for its new consolidated headquarters in Rancho Bernardo. Northrop Grumman also expanded into an existing 222,500 sf building at Summit Rancho Bernardo. We also saw notable move-ins from the California Institute of Art & Technology (44,000 sf in National City), Synteract (37,000 sf in Carlsbad), and Certona (32,000 sf in Sorrento Mesa).”
He added, “Countering some of this new occupancy, however, we did see a few notable give-backs as Microsoft Mobile terminated its 197,000-sf lease at Summit Rancho Bernardo, and Lockheed Martin vacated 112,000 sf at Horizon Tech Center in Scripps. Nonetheless, the amount of user expansion and new occupancies by far continues to outweigh any vacancies.”
Countywide, Class A vacancy did report a marginal 20 basis point (bps) increase to 15.4%, which was partially due to the delivery of a few vacant speculative projects in Central County. However, the majority of new projects were delivered fully leased. Furthermore, the report indicates that despite recent construction levels, Class A vacancy remains more than a full percentage point below its rate a year ago.
Ms. Campion said, “Six new buildings in Central County submarkets, totaling 565,600 sf, were completed in the third quarter, four of which were 100% pre-leased at the time of delivery, representing over 85% of the new space. This exemplifies the ongoing demand and need for higher quality product by today’s users.”
Meanwhile, Class B vacancy, which has teetered a bit in recent quarters, shed a notable 120 basis points in the third quarter to decrease to 13.3%.
Derek Hulse, Managing Director of Cushman & Wakefield’s Office Division, noted, “A number of large leases have been signed in previous quarters that will continue to lend support to future market growth as these tenants begin taking occupancy of their premises. Mid-to-larger users such as Amazon, La Jolla Pharmaceuticals, ServiceNow, Wells Fargo, Nuvasive, Lighthouse Strategies, KPMG, and Tsunami ARVR are all growth companies having new in-place leases for planned occupancies in 2017 and 2018 in San Diego—these occupancies range from 20,000 sf to over 100,000 sf.”
He added, “Further, a great deal of absorption will come from leases signed for projects currently under construction. ViaSat, which is headquartered and employs nearly 2,000 workers in Carlsbad, is expanding its presence. The company’s Bressi Ranch site in Carlsbad is planned for approximately 500,000 sf at build out, with 280,000 sf scheduled to be completed in 2018. Also to be completed in 2018 is the 110,000-sf build-to-suit project for Palomar College in Rancho Bernardo.”
Mr. Hulse added to his thoughts on future growth, “Our pool of active tenant requirements remains robust at 2.8 msf over the next 24 months countywide, with 1.9 msf stemming in Central County. A majority of these tenants have already sent out proposals and are still in the intermediate stages of their search.”
The Cushman & Wakefield reports are available for download, below
- CLICK HERE to access Q3 2017 San Diego MarketBeat Office Report summary.
- CLICK HERE to access Q3 2017 San Diego Office Historical Snapshot + submarket stats.
- CLICK HERE to access Q3 2017 San Diego Office Infographic.
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