Jolanta Campion Campion: “San Diego is the 8th least-affordable metro in the US with housing affordability of 20% compared to 60% nationwide as of Q3 2016, which positively affects demand for multifamily. As a result, developers continue to be bullish to meet San Diego’s growing housing demand.”

SAN DIEGO—San Diego County’s trade, transportation and utilities sector recorded the largest monthly employment increase by adding 2,200 jobs in December 2016, Cushman & Wakefield’s research director for San Diego Jolanta Campion tells GlobeSt.com. The firm recently reported that San Diego County’s unemployment rate decreased 10 bps from November 2016 to 4.2% in December 2016 and decreased 60 bps from a year ago, with December representing the third consecutive monthly decrease. Also, between December 2015 and December 2016 San Diego County added 28,900 jobs, an annual increase of 2%.

We spoke with Campion about the causes of the decrease, what the employment scenario looks like for the region and how it could affect commercial real estate here.

GlobeSt.com: To what do you attribute the decrease in San Diego’s unemployment rate?

Campion: San Diego’s unemployment rate decreased 10 basis points (bps) from 4.3% rate in November of 2016 to just 4.2% in December of 2016, according to revised monthly data released by the Employment and Development Department. To put this very healthy rate into perspective, San Diego’s 27-year (1990-2016) annual average unemployment rate is 6%, while an unemployment rate around 5% is considered to be full employment. December represented the third consecutive monthly decrease. In 2016, unemployment dropped 60 bps from its mark of 4.8% a year ago and has plummeted 690 bps from the peak post-recession rate of 11.1% seven years ago (January 2010).

This monthly decrease in unemployment can be attributed to the trade, transportation and utilities sector that recorded the largest monthly increase by adding 2,200 jobs. Educational and health services added 1,000 jobs, led by growth in the healthcare and social-assistance sectors. Financial activities added 100 jobs.

The San Diego region collectively added 28,900 jobs (+2.0%) year-over-year through December 2016.  Government recorded the largest year over gain with the addition of 6,300 jobs (+2.6%). Local government accounted for 65% of the growth (up 4,100 jobs). Educational and health services added 5,700 jobs (+2.9%), with healthcare and social assistance accounting for 86% of the growth (up 4,900 jobs or +2.9%). Other growth sectors included professional and business services (up 5,500 jobs or +2.4%); leisure and hospitality (up 5,400 jobs or +3%); trade, transportation and utilities (up 2,500 jobs or 1.1%); financial activities (up 2,200 jobs or +3%); other services (up 2,100 jobs or 4%); construction (up 400 jobs or 0.6%); and information (up 400 jobs or 1.7%). Manufacturing was the only sector to report a year-over-year decline with an overall loss of 1,600 jobs, or 1.5%.

GlobeSt.com: How would you characterize the employment scenario in San Diego?

Campion: San Diego’s economy is the 4th largest of 58 counties in California and 17th largest of 382 metros in the nation with a $220.6 billion annual output, based on 2015 data. If it were a state, it would rank as the 26th largest economy in the US, and if San Diego County would be a country, it would rank as 46th largest economy in the world among 196 countries.

The top five industry sectors—government, professional and business services, healthcare, retail trade, accommodation and food services—provide 68% of 1.4 million jobs countywide. The good news is that none of the sectors account for more than 20% of employment, resulting in a diverse employment base. Government and military continues to be the number-one sector for employment, providing 17% of total jobs as well as economic output (19% or $41.5 billion) as measured by region’s gross regional product. The primary reason is San Diego receives more in military spending than any other metro in the nation.  Just a notch below, professional and business services sector is the second-largest employment source, providing approximately 17% of total jobs in the region. Real estate, rental and leasing industries make up the second-largest segment of San Diego’s GRP, accounting for 18% or $38.4 billion.

More than 30% of private-sector jobs are provided by the region’s innovation economy, composed of nine knowledge-based sectors on the leading-edge of research, innovation and development of the technologies. These nine sectors are defined by businesses involved in the development and production of technical equipment, communications and/or advanced technology services, and monthly jobs are counted across multiple employment sectors tracked by Employment and Development Department. These innovation jobs also pay 2.4 times more ($116,300) than the rest of the jobs ($49,350), according to a recent report from CONNECT (using 2015 stats). San Diego ranked #4 in California for 405 startup companies established and #1 for new innovation life-science startups, totaling 81 created. Software startups accounted for the highest number or 63% of 405 startups created since software-app-development companies continue to drive the growth innovation startups in San Diego and in California. Total number of startups created has exceeded 400 for the last three consecutive years, compared to a total ranging between 241 and 332 between 2005 and 2012. Needless to say, San Diego’s employment market is positively affected by a growing innovation economy sector (as well as overall economy), since this sector accounts for 24% or $52 billion of regions’ economic output. GlobeSt.com: How does this affect the region’s commercial real estate market?

Campion: San Diego’s commercial real estate market remains driven by stable regional employment and economic growth. All employment sectors combined added 28,900 jobs in 2016, which positively affected demand for commercial real estate in the region. This employment growth in turn has resulted in continued (and in some instances historic) real estate occupancy growth and subsequent rental-rate growth translating to ongoing investor demand as well as a need for the new construction that is advancing our region. The office market achieved more than 1.5 million square feet of positive annual net absorption (change in occupancy) in 2016, its highest level since 2005 when it absorbed more than 1.9 million square feet. Total office vacancy dropped to 14.5% in Q4 2016, down from a rate of 15.6% a year ago. This reflects a substantial decline of 720 bps from the peak post-recession vacancy level of 21.7% reported seven years ago. Propelled by the ongoing economic expansion, there are several large blocks of office space expected to be absorbed ahead, with much of this activity attributed to leases already signed for projects under construction. We are currently tracking 15 buildings totaling 1.1 million square feet under construction countywide, all of which are scheduled for completion in 2017 and more than 75% already have commitments in place. The biotechnology and healthcare sectors are also having a tremendously positive impact on San Diego’s economy. The life-sciences sector is viewed by our experts as the healthiest it has been in a decade. Existing lab opportunities are extremely limited across virtually every size. The San Diego laboratory market boasted a very healthy 5% direct vacancy at year-end 2016. San Diego’s tech industry is also blossoming and fueling the office sector. These companies are also driving the need for new high-quality construction projects to meet their modern and creative needs. We have reached the time when the Millennial generation has surpassed Baby Boomers (744,033 people) in San Diego, as well as California and the US. The Millennial generation, also known as Gen Y, is the largest age group in San Diego County, representing 1.02 million people or 31% of the total population of 3.3 million countywide. More than a half or 53% of Gen Y are of the prime age (ages 25–34) influencing trends and demand for modern and amenity-rich office projects.

Co-working is also gaining momentum driven by the Millennial generation’s desire to connect to community and network with other companies while working in the same environment.

The industrial market recorded over 450,000 square feet of positive net absorption in Q4 2016, signifying the 22nd consecutive quarter of industrial expansion. During this five-and-a-half-year period, tenants absorbed nearly 12 million square feet of space, or 540,000 square feet per quarter. 2016 was the seventh consecutive year of occupancy gains in the industrial market. Retail vacancy at year-end 2016 fell to 4.5%, down from 4.8% at mid-2016. A year ago, vacancy stood at 5%. 2016 was the fifth consecutive year of occupancy growth across all center types combined. Food-related retail remains the hottest growth category. Deal activity is being driven by either restaurant or grocery concepts. Smaller format or niche grocery concepts—including organic, off -price, ethnic and upscale—continue to gain ground. Most of the growth in restaurants is among fast-casual chains.

The San Diego County multifamily market vacancy was just 2.17% as of September 2016, down from a rate of over has 5% five years ago. A vacancy rate below 5% is considered to be a landlord’s market. Countywide multi-family average rental rate was $1,743, 8.4% higher than a year ago and 15.1% higher than two years ago, according to MarketPointe Realty Advisors. San Diego is the 8th least-affordable metro in the US with housing affordability of 20% compared to 60% nationwide as of Q3 2016, which positively affects demand for multifamily. As a result, developers continue to be bullish to meet San Diego’s growing housing demand.

Total sales volume for transactions $5 million and greater totaled $7.5 billion in 2016, $2.3 billion above the long-term annual average of $5.2 billion. Office sales accounted for 36%, and multifamily sales accounted for 32%, followed by retail (18%) and industrial (14%), of the total in 2016. Over the last 12 months, the average cap rate for office-sale transactions $5 million and above throughout San Diego County has remained in the mid-6% range, ending Q4 16 with 6.6%, compared to 6.3% in Q4 15.

GlobeSt.com: Where do you see the employment situation heading here?

Campion: Continued economic and job growth drove occupancy and rent growth in 2016, and that trend is expected to continue in 2017. Overall, San Diego has grown slightly faster than the US as a whole throughout the current expansion, and job growth in the metro area has accelerated over the past two years. We anticipate the region will continue to outperform.

A few key economic outlook indicators reflecting positive growth that we are following include:

Professional and business sector is forecasted to grow 3.5% in 2017 and 2.9% in 2018, in line with a 30-year historical average of 3.3%.

Employment in the healthcare sector is forecasted to grow at 3.2% rate adding 5,340 jobs in 2017, positively affecting demand for office space. Office employment is forecasted to add 9,600 jobs in 2017 growing 3.1%, above the 30-year average of 2.7%.

Employment in manufacturing sector is the only sector with a negative job growth with an estimated loss of 310 jobs in 2017. However, with an increased presence of innovation economy in the region some of these jobs are being replaced with higher-paid knowledge-economy jobs focusing on product and software development instead of manufacturing.

All employment sectors are expected to grow in 2017 by a combined rate of 2.1% in 2017, in line with a 30-year average growth rate of 2%.

As a result of six consecutive years of healthy employment growth in the region, average annual unemployment has decreased 610 bps since 2010 to a rate of 4.7% in 2016, lower than both California (4.9%) and the nation (5.4%). Annual average countywide unemployment in San Diego is projected to decrease further to a rate of 4.4% in 2017, according to Moody’s Analytics forecast.