SAN DIEGO—Traditionally, the Downtown San Diego office market was primarily made up of legal, government and insurance tenants, but the creative class has discovered the benefits of San Diego's unique downtown submarkets, CBRE SVP Matt Carlson tells GlobeSt.com. According to a report from the firm, fourth-quarter office vacancy in San Diego County fell to a record low, and leasing activity was the highest ever in any single quarter. Demand was particularly strong in Downtown, where startups and co-working places have been drawn to the neighborhood's newly renovated office spaces.

A total of 2.55 million square feet of office space was leased in San Diego in Q4 2016, making the fourth quarter the most active quarter in history, the report showed. The top three submarkets were Downtown, UTC and Rancho Bernardo.

“Downtown San Diego led the county in 2016 in net absorption and leasing activity, and is currently at historic peak rents,” says Carlson. “Downtown accounted for more than one-third of all the county's absorption in 2016. The CBD is luring innovative startup companies because of the attractiveness of the live-work-play environment, and I believe we will continue to see an increase in leasing activity coupled with high rents.”

The city's downtown neighborhood has continued to up its appeal since older buildings have been converted into creative office or retail spaces and towers have received upgrades. Among those companies that have been adding space in this part of town are WeWork, which opened two of its six leased floors at 600 B St., joining several smaller-scale co-working operators in the area. Another co-working operator, Level Office out of Chicago, purchased a building in the third-quarter 2016 and will open upon the completion of renovations currently under way.

The report also revealed that Downtown had the highest year-to-date positive net absorption of 663,831 square feet; a large portion of that occurred in the fourth quarter when the City of San Diego leased approximately 305,000 square feet at the former Sempra Energy headquarters. Kearny Mesa had the second-largest year-to-date positive net absorption with 342,340 square feet.

In the fourth quarter, the fully leased i3 Campus developed by BioMed Realty added 316,262 square feet of positive net absorption. The project consists of three buildings and was previously classified as lab space until Illumina took up the entire campus, dedicating the majority of the project to office use.

Overall, 446,794 square feet of new office space was delivered in San Diego County last year, less than the yearly amounts in 2014 and in 2015.

We spoke with Carlson about the types of tenants who are interested in leasing Downtown San Diego office space, where they are looking and the type of space they're seeking.

GlobeSt.com: What types of tenants are interested in leasing Downtown San Diego office space?

Carlson: Traditionally, legal, government, insurance and some engineering made up the majority of Downtown office tenants, but the change that's come in has been a lot more creative-type groups like successful digital-media companies and more engineering firms. It's pretty exciting. It has also now gone to tech, software, web design and app-focused tenants, and we've seen some organic growth with some gaming companies as well. We still have the foundation of the market—there's still a lot of legal since the courts are Downtown and government, etc., but the exciting spaces are more of the TAMI tenants: technology, advertising, media and information companies. Those are the ones that have made up some of the larger transactions in the county recently.

GlobeSt.com: What parts of town interest them?

Carlson: A lot of the groups we're talking about either have offices in other cities or investors in other cities or have seen cool things in other cities. They want brick and timber, older historic buildings with character and amenities. Downtown San Diego is not a big creative-office market. Certain parts of L.A. and Chicago had former industrial areas converted to cool office space with brick and timber. We don't have a lot of that. They want to be right in the middle of Little Italy or the East Village, but that stock is smaller floorplates; we don't have big floorplates like many other cities. So, they end up in the highest-amenitized areas with the highest rents. The East Village is highly amenitized, walkable and a great place to office, eat, recreate and go out on the weekend. People are attracted to the East Village whether they're looking for a small building with space close to the ground or a tower like DiamondView. It has a county park, a railroad station and a trolley station close by.

We're also starting to see office buildings at the end of West Broadway trying to take advantage of the walkable amenities as Little Italy moves south. The problem is that the majority of the office market Downtown is on B St. or on Broadway, which is not in either of those areas I mentioned. We're seeing tenants flocking toward vacancy. Most of the occupancy came from large blocks of space that are more in core of Downtown. Folks know where they want to be, but there's not always availability, and a lack of new product Downtown makes it difficult. People who want to move from the suburbs to Downtown can't find what they're looking for. So, as people market the buildings of West Broadway, they talk about the area amenities; we're hearing the west-side office tenants all talk about Little Italy to try to bring them together in everyone's thoughts and minds.

GlobeSt.com: What type of space are they seeking?

Carlson: The general trend in office space right now everywhere is less personal space, more common space. Companies have gone to 6×6 desks or benching; there are fewer private offices. There's less space to put up 10 awards and pictures, but more common space and larger conference rooms so groups can get together and work in pods. Tenants also want to expand out to the buildings with a lobby that's energized and has retail in it, more like a hotel lobby. At the W in Austin, people hang out in the lobby; it has big cozy chairs. People want to interact with the building; it's not just a place to walk through to get to their space, but also a place to meet or grab a beer. They want fitness, yoga, Pilates—some office owners hold yoga glasses in vacant suites or put spin studios in their buildings even though they don't have a lot of space.

All suburban buildings have been trying to hyper-amenitize their buildings so people don't leave building. They try to bring everything to the campus, which is difficult to do and expensive. But Downtown, you get to “own” whatever is close by. You get to “own” it from a branding perspective—the trolley station, the 200 restaurants in the Gaslamp and all the amenities in and around B St. because the Gaslamp is only a couple blocks away. Downtown is great for blurring the lines between working and recreating. people want a lot of things around them, and Downtown is taking advantage of that.

GlobeSt.com: What else should our readers know about this demand?

Carlson: We saw more absorption in 2016 than we ever saw before in Downtown. The second half of the year was incredibly strong, and the tenant mix was on the forefront of new technology and creation. In the last cycle, people saw a lot of residential built Downtown, but it was condos; people bought second homes, but they weren't always in them, or folks retired to Downtown condos to travel more. But this time, it's all been for-rent product; we're seeing people living Downtown in these spaces. There's more light, people walking dogs, people on the street. The change in this cycle was more people living and working in the same area. Last time, we saw a lot of big towers go up, but not a lot of people on the street; now it's different.

Overall, 446,794 square feet of new office space was delivered in San Diego County last year, less than the yearly amounts in 2014 and in 2015.

We spoke with Carlson about the types of tenants who are interested in leasing Downtown San Diego office space, where they are looking and the type of space they're seeking.

GlobeSt.com: What types of tenants are interested in leasing Downtown San Diego office space?

GlobeSt.com: What parts of town interest them?

GlobeSt.com: What type of space are they seeking?

GlobeSt.com: What else should our readers know about this demand?

Instant Insights /

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