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Office Vacancy Dips Below Pre-Recession Levels in San Diego throughout Q2 2018

Highest asking rate on record for San Diego County

San Diego County CA— According to CBRE’s Research, the San Diego office market continued to demonstrate mostly positive fundamentals throughout Q2 2018 and saw vacancy dip below pre-recession levels.

The San Diego office market improved from previous quarters in Q2 as absorption surpassed 500,000 sq. ft. and vacancy dropped to a post-recession low of 10.6 percent. There was a large volume of sizeable deals with total leasing activity reaching almost 2.3 million sq. ft., the most since Q4 2016. A few of the large deals that triggered positive absorption were downsizes, from R&D spaces and into office, therefore they will hit the industrial market as vacant instead of office.

“The San Diego office market remains strong as it continues to experience positive net absorption,” said Christopher Pascale, senior vice president of CBRE in San Diego. “Due to the lack of new construction and strong office job growth, we are seeing record asking rates across the board, with most submarkets surpassing pre-recession highs. While not a great surprise, defense dominated the absorption year to date, with the I-15 Corridor being the recipient of this good fortune. The projects that are succeeding are with the best amenity package – food, fitness, recreation, outdoor spaces, services and so forth—these are the projects are also seeing the highest lease rates.”

Asking rates increased $0.03 (+1.0 percent) quarter over quarter to $2.95, the highest asking rate on record for San Diego County. The rate increased for the sixth consecutive year, up $0.11 (+3.9 percent) from Q2 2017. Asking rents for Class A space have been climbing due

to limited supply mixed with strong demand; they increased 3.1 percent to $3.38. Class B rates grew 4.0 percent as landlords add amenities to compete. Asking rents were higher year over year in all major submarkets and five of those (Del Mar Heights, Mission Valley, Sorrento Mesa, Downtown and Carlsbad) reached or surpassed previous peaks.

There were 666,656 sq. ft. under construction in Q2, a four-year high. More than 50 percent of the space is a four building, 357,000-sq.-ft., Class A project in Carlsbad on Town Garden Road. A 50,000-sq.-ft. office building broke ground Downtown in the IDEA District and is fully leased by UCSD.

Among deals over 20,000 sq. ft., financial services, insurance and legal were the most active industries, while the most active submarkets were Sorrento Mesa, Rancho Bernardo and Del Mar Heights. There were 21 deals over 20,000 sq. ft. in Q2 2018 compared to 14 deals in Q1 2018. Five of those deals were greater than 100,000 sq. ft., which is atypically high for the San Diego office market where most deals are mid-sized or smaller.  New deals outweighed renewals, although supply constraints have made it difficult for larger tenants who wish to relocate to or within the market to find the space to fit their culture, growth plan and employee base.

Strong office job growth coincided with the increased leasing activity in the market. Office-user jobs increased 13,400 or 4.2 percent year over year in San Diego, which was also the highest office growth rate since Q1 2013. More than half of the jobs were in professional, scientific and technical services (PST), which serves as an indicator for high-tech services growth. PST companies added 8,600 jobs or 6.8 percent growth, compared with a national average of 2.4 percent.

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