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San Diego Office Market Soars in 2017

Scorching Second Half Fuels Strongest Annual Growth since 2005

San Diego County CA— San Diego’s office market flourished in the second half of 2017, according to Cushman & Wakefield’s latest year-end market report. With a commanding 716,600 square feet (sf) of positive net absorption in the third quarter, San Diego’s office sector added another 356,000 sf of net gains in the fourth quarter, which pushed this market to well over 1 million sf of occupancy growth in the past six months.

“San Diego recorded an astounding 1.6 million sf (msf) of office net absorption overall in 2017, observing its highest annual figure since 2005’s 1.9 msf,” said Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego. “The fourth quarter represented the 14th consecutive quarter of positive net absorption in the region’s office market.”

She added, “This market has benefited greatly from nearly 9.2 msf of occupancy growth over the past eight years, beginning in 2010. Moreover, San Diego has averaged a remarkable 1.5 million sf of positive net absorption per year over the last four years. These levels continue to reflect the market’s stable climate as well as endurance, and we expect 2018 should continue to experience growth.”

According to Brett Ward, Leed AP, Managing Director of Cushman & Wakefield’s Office Division in San Diego, “Fourth quarter absorption was driven by a diverse range of companies filling larger spaces, such as by Mission Federal Credit Union, Amazon, La Jolla Pharmaceuticals, Wells Fargo and PIMA Medical Institute.” He added, “For the year as a whole, demand drivers including Life Science, Technology and Defense accounted for over 50% of San Diego’s leasing activity in 2017. Some of the major transactions for the year included Illumina’s expansion in Eastgate, Northrop Grumman’s expansion in Rancho Bernardo, Nuvasive’s expansion in Sorrento Mesa, Takeda Pharmaceuticals’ build-to-suit in Eastgate, and Amazon’s new lease in Campus Point.”

He continued, “Despite some fluctuations earlier this year, we expect the ongoing momentum from 2017 to carry into 2018 as a result of continued expected job and economic growth in conjunction with further robust tenant demand. Additionally, a number of large tenants who have executed leases but have not yet taken occupancy will further boost absorption in future quarters. Companies such as Nuvasive, ServiceNow, AbacusNext, Kratos, WeWork, KPMG, GreatCall, Tsunami ARVR, Hub International and iMatrix all have outstanding occupancies ranging from over 25,000 sf to over 100,000 sf. There are also more planned occupancies at major new development projects from prominent corporate users like Takeda, ViaSat, and MedImpact to name a few.”

Per the report, countywide office vacancy decreased to 13.3% in the fourth quarter of 2017, a quarterly decline of 40 basis points (bps) and an annual decline of 120 bps. Vacancy now stands at its lowest level in 11 years when it was last 13.3% in the fourth quarter of 2006. Office vacancy was the lowest in South County (10.6%), followed by Central County (13.6%) and North County (16.1%). Countywide, Class A vacancy was 14.7%, down 70 bps from last quarter and 80 bps from a year ago, while Class B overall vacancy was 12.9%, down 40 bps from last quarter and 80 bps from a year ago.

The year-end 2017 report showed overall average asking rents for all office space across San Diego was $2.96 psf per month on a full service basis. This marked an increase of $0.17 or 6% from 2016. Notably, this also stands nearly $0.20 or 7% above its peak of the prior cycle ($2.77 in Q1 2008). Class A asking rents closed 2017 at an average of $3.32 psf. Comparatively, Class B was $2.84 whereas Class C space was well below at $1.90. Class A asking rents were up 1.5% from a year ago, while Class B and C were up 11% and 8%, respectively, year over year.

New construction is expected to remain a significant contributor of growth this coming year although it could potentially impact vacancy. Derek Hulse, Managing Director of Cushman & Wakefield’s Office Division, noted, “There are 15 properties totaling nearly 1.3 msf currently under construction countywide, 14 of which are scheduled for completion in 2018. Just over 740,000 sf of the total inventory under construction is attributed to build-to-suit projects, which translates to 58% pre-leased. Meanwhile, three of the properties under construction are creative office renovations of previously existing buildings.”

He added, “Significant improvements and renovations to existing projects are another point of emphasis for today’s owners in order to stay competitive. Landlords of lesser quality, outdated properties electing not to modernize their facilities face far greater challenges competing in today’s active market. Developing, or repositioning, projects that can deliver a true live/work/play environment is another trend on the rise for San Diego. Submarkets with infill multi-family opportunities, retail/restaurant amenities and good freeway and public transportation access will continue to thrive and grow in this cycle and beyond.”

Mr. Ward projected, “With new office development at comparatively conservative levels and continued strong organic growth, expect another strong performance in 2018. San Diego has averaged in the neighborhood of 2% office job growth annually which equates to approximately 1 million sf of required office space to accommodate these new employees. This level would reduce countywide vacancy to single digits and justify rent growth across the San Diego market versus solely on the asset level.”

CLICK HERE to access Q4 2017 San Diego MarketBeat Office Report summary.

CLICK HERE to access Q4 2017 San Diego Office Market Statistics by Submarket (historical).

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