SAN DIEGO—With some 300,000 square feet of new office buildings set to deliver all over San Diego County, absorption might be dampened, but overall the market is looking healthy, Colliers International VP Derek Applbaum tells GlobeSt.com. According to a recent report from the firm, speculative office construction is picking up, with 731,457 square feet to be completed this year and in 2018.

The report also found that 2017 began with slightly negative countywide net absorption of -58,325 square feet, and the average asking rental rate countywide increased to its highest achieved rate in the last eight years of $2.59 per square foot per month.

We spoke with Applbaum about the report's findings and the dynamics between office deliveries and absorption.

GlobeSt.com: How much can office rents continue to climb and still leave San Diego competitive with nearby markets?

Applbaum: If you look at some of the Q4 2016 numbers for Orange County versus San Diego, those two markets are very similar in terms of rate. I don't know that much is going to change. Rates over the last two to three years have been steadily increasing 5% to 10% per year, and this year, we might see it increase a little—3% to 4% would be a crystal-ball guess. San Diego has seen a little bit of a lack of new product over a handful of years. Last year, we saw the least amount of new construction we had seen in four years, so I think that actually can keep rates up.

To use MV as an example market, those rates have exceeded the peak rates of 2007 and, in some cases, are just starting to get there. How far can it go up from there? I don't' know that it's going to keep pushing at that level; it might slow down to maybe 3%. San Francisco's rental rate has always been double our number. Their bottom of the market has been our top office pricing.

GlobeSt.com: Where do you see office absorption heading for 2017 as compared to 2016?

Applbaum: I don't know that it's going to be so heavily positive or negative this year. There will be some new construction to finish this year, and we are expecting 300,000 square feet of newly constructed product. Casey Brown's former Union Tribune property is reentering the market at 30,000 square feet, and as product gets put on the market, it could have negative absorption. There is a handful of tenants looking for opportunities at 45,000 square feet to north of 100,000, but when are they going to be able to lock in those deals? It's the magical wand of landlord TIs and concessions combined with what tenants can really handle. So, I believe we will see more on the positive side in rents, but not a big jump. Mission Valley will be flat; we might see some submarkets pop with tenants coming in, but new product deliveries will keep absorption down a little bit.

GlobeSt.com: In which submarkets is speculative construction being seen the most?

Applbaum: You're seeing it with Kilroy's product right now. Kilroy's got 280,000 square feet coming with the One Paseo project in Del Mar Heights. You also have Irvine Co., which finished Eastgate Summit last year in the UTC submarket; that's a 90,000-square-foot opportunity there, and they can start doing TIs on those buildings.

GlobeSt.com: What's your view of the overall health of San Diego's office market?

Applbaum: It's been healthy the last couple of years. Rates have gotten back to or exceeded peak rates of the '06-'07 period. Lack of construction in the market has given existing buildings a chance to lease up. Mission Valley is back in the single digits of vacancy, and Downtown and central-county-market rates are at or exceeding peak levels from '07. The strongest product is in UTC, where the Irvine Co. is asking $4.50 or higher per square foot. Hines' rates are back in the mid-$4.00s. San Diego is back to where we haven't seen these numbers in a long time, and we're starting to see them push through the ceiling.

We spoke with Applbaum about the report's findings and the dynamics between office deliveries and absorption.

GlobeSt.com: How much can office rents continue to climb and still leave San Diego competitive with nearby markets?

GlobeSt.com: Where do you see office absorption heading for 2017 as compared to 2016?

GlobeSt.com: In which submarkets is speculative construction being seen the most?

GlobeSt.com: What's your view of the overall health of San Diego's office market?

Instant Insights /

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