SAN DIEGO—The San Diego office market continues to improve with solid positive net absorption in the second quarter of 2015. This according to a report released by Kidder Matthews based on research from Co-star.

The office vacancy rate in the overall San Diego market dropped further, to 11.29% from 11.49% at the end of the second quarter. Net absorption doubled this quarter, with 367,174 square feet of occupancy gains. Construction activity remains fairly flat, with no buildings delivered to the market yet this year, however, 740,336 square feet is currently under construction. The San Diego County unemployment rate sits at 4.9%, a 0.3% decrease from last quarter, and down 1.4% from a year ago.

class A office space vacancy increased slightly to 9.8% from 9.5% during the past quarter and availability increased slightly from 13.3% to 14.4%. Net absorption for class A space this quarter was 49,345 square feet, with 552,942 square feet of leasing activity, pushing year-to-date class A leasing over 1.1 million square feet. Office lease rates for class A average $2.95 per square foot across the San Diego market, an increase of 5% over the past year. Users seeking class A space pay a $0.77 per square foot premium over class B and C space, on average. Demand for high quality space continues to be strong, providing landlords the opportunity to drive rates and pull back on concessions. Markets such as Del Mar Heights and UTC in particular have witnessed lease rate increases in excess of 20% over the past few years, leaving many tenants facing lease renewals with “sticker shock” as they prepare to navigate the market.

Class B and C office space hit its stride this quarter, with over a million square feet of leases signed and 316,042 square feet of net absorption. Class B and C space had a quarter-end vacancy rate of 12%, a decrease of 50 basis points from last quarter. The class B market continues to provide attractive alternatives to budget-sensitive tenants, as rates are $0.50 to $0.75 per square foot cheaper than comparable class A space. As class A users start relocating to class B product and increase demand, rates will rebound and start to close this gap. Asking rental rates for class B and C product has increased 6.98% over the past year, to an average of $2.18 per square foot, on a monthly full-service basis.

San Diego's investment sales market has been strong in 2015, with $1.22 billion in total transactions, a 21% year-over-year increase. The price per square foot increased as well, and now averages $280 per square foot. The most notable properties to change hands this quarter were The Aventine in UTC (238,979 square feet), Kilroy Governor Pointe/Wateridge (385,507 square feet) and Towne Centre Tech Park (288,244 square feet). The average cap rate continued to drop this quarter, down to 5.9%, well below the national average of 6.7%.

Notable Lease Transactions

Daybreak Game Co. - 15051 Avenue of Science, Rancho Bernardo, 69,967 s.f. (leased)

Cox Communication - 5887 Copley Drive, Kearny Mesa, 59,965 s.f. (leased)

GoPro - 5600 Avenida Encinas, Carlsbad, 45,282 s.f. (leased)

Synthetic Genomics, Inc - 11149 N Torrey Pines Road, Torrey Pines, 44,768 s.f. (renewed)

Instant Insights /

San Diego Office Market Makes Strides

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