San Diego Office Space Rental
With little to no office employment growth shown in 2007, the market for San Diego office space rentals has showing signs of slowing down in 2008, waiting for newly constructed space to be absorbed and for rent rates to level off. Over the past three years, vacancy rates have increased from about 8.7 percent to 10.5 percent and average annual rental rates have bumped up from $28.42 to $30.69 per square foot. With more than 3 million square feet of office space constructed in 2007, and more than 3 million square feet currently under construction and expected to be delivered this year, we may find the market oversupplied and vacancy rates rising.
Nearly 2.3 million square feet of space was absorbed in 2007, which almost doubles the absorption of the previous year, and more is being built throughout San Diego County. Of the current office projects proposed or under construction, most will be developed in areas away from Downtown, Kearny Mesa and UTC. Of the 209 projects proposed or under construction, 21 percent are located in Carlsbad, 20 percent in San Marcos/Vista, 10 percent in Oceanside, 10 percent in South San Diego, 9 percent in East County and the remaining construction in other areas of the county. Downtown accounts for 1 percent, Kearny Mesa 4 percent and UTC 1 percent.
The return to a lower and more consistent rate of annual net absorption is creating new opportunity for office tenants as landlords in some submarkets re-introduce incentives, such as rent concessions and increased allowances. Additionally, as some companies are downsizing, particularly in the residential debt and real estate sectors, an influx of sublease space is creating more affordable opportunities for other office users. Countywide vacancy, including owner-user space, stands at 12.1%, with vacancy on leasable inventory higher at 14.2%.
Now that the market has begun to adjust, landlords in general are holding firm on their asking rates, but some are offering incentives which lower the effective rent over any lease term. just under 3 million square feet of new office space that is under construction, most of which is located in Kearny Mesa, Torrey Pines, Scripps Ranch and Rancho Bernardo.
Downtown San Diego
Diamond View Tower at PETCO Park, which is now approximately 84% leased. With Advanced Equities Plaza 79% leased, full floor options downtown are becoming more limited. There are nine office condominium projects downtown, including Columbia Court which is 42% sold. However, some of these projects are reverting to leasing strategies including Fletcher Sky Lofts, MetroWork and the conversion of the former Chicago Title building.
Downtown asking rental rates are averaging $2.57 per square foot, with rates for Class A and Class B space at $2.90 and $2.62 per square foot, respectively.
Like most San Diego County office markets, net absorption in Mission Valley is slow. The area has seen an increase in sublease space, particularly as the downturn in the residential markets has caused mortgage and title companies as well as lenders and some contractors to downsize or close offices altogether. However, projects like Hazard Center continue to be very successful - offering a great product with attractive parking and flexible terms that fairly reflect the market. It consistently retains a high occupancy rate with space re-absorbed quickly once it becomes available.
Mission Valley's vacancy rate of 11.3% on total inventory and 11.8% on leasable inventory is not expected to increase substantially. Th is market has always been insulated from major market swings by virtue of its central location, ample supply of free parking, abundance of amenities and selection of product.
Average asking rental rates in Mission Valley across all classes are $2.12 per square foot (Class A rates average $3.00 per square foot, Class B rates average $2.14 per square foot, and Class C rates average $1.83 per square foot.)
Kearny Mesa leads the San Diego County office market in new construction with 955,560 square feet under way. Even with a host of projects that came online beginning 4 th Q 2007 and continuing into 2008, Kearny Mesa vacancy is still well in the single digits, standing at 7.6% on total inventory and 8.7% on leasable. Vacancy is anticipated to increase as these new projects come on line. However, with a very limited supply of land for new development and strong historical demand and occupancy, any spike is expected to be short-lived.
Current overall asking rental rates in Kearny Mesa are $1.98 per square foot, with average asking Class A and Class B rents higher at $2.56 and $2.08 per square foot, respectively.
Now that commute times have eased between UTC and Del Mar Heights following the completion of additional lanes on the 805/5 merge, executives who chose Del Mar Heights to be close to their homes and avoid travel time may look twice at UTC because of the outstanding amenities and space opportunities it offers. Office vacancy in UTC stands at 10.9% on leasable inventory and 10.1% on total inventory. Average asking rental rates in UTC are $3.35 per square foot. Class A rates average $3.47 per square foot with Class B rates averaging $3.02 per square foot.
Highway 56 Corridor
San Diego's newest office submarket, the Highway 56 Corridor,... all available space in the Highway 56 Corridor has been occupied (0% vacancy).no new construction will be completed in 2008.
The I-15 Corridor is transitioning into one of San Diego County's more sought after office markets. The completion of the State Route 56 has made the I-15 Corridor communities of Poway, Scripps Ranch and Rancho Bernardo more accessible, and their proximity to executive and work force housing, services and amenities add to their appeal. Poway s existing inventory filling; in RB, new construction has begun; Momentum in Scripps Ranch continues to grow: Scripps Ranch is seeing a wave of investment and development activity as developers position themselves to take advantage of an area they see having tremendous potential, with several new projects in the works.
Impacted by a notable drop-off in Class A tenant activity, Sorrento Mesa has a large supply of existing blocks of space in the 25,000- to 50,000-squarefoot range. Tenants in Sorrento Mesa are resistant to Class A rates and the market will continue to see relocations to other nearby markets off ering below market sublease options, like the SR- 56 and I-15 corridors, or in sublease opportunities in UTC and Del Mar Heights.
San Diego County's commercial real estate markets are remarkably stable. Despite slowing job growth - down from 19,000 in 2006 to 16,000 in 2007 - and a local economy reeling from the loss of about 5,000 jobs in real estate construction, the diversified employment base is obviously the prime factor in propping up the commercial sector, despite a residential sector that is perhaps approaching its lowest point in 15 years.