SAN DIEGO—Investor interest in the San Diego office market remains steady, and the bid-ask spread between buyers and sellers is expected to narrow, with more trades happening in the fourth quarter, Yardi Matrix's director of business intelligence Doug Ressler tells GlobeSt.com. According to a Q3 report based on a study by the firm and COMMERCIALCafe, San Diego registered a 340% year-over-year increase in sales volume, jumping ahead of the Bay Area, with 2.31 million square feet traded across 15 deals, making this its best quarter in five years.

The report also stated that San Diego's great Q3 also made its average price per square foot ($358) rank third among California markets—just behind Los Angeles with $395 and San Francisco at $503. And San Diego scored the quarter's second-largest deal in California with the sale of DiamondView office tower in Downtown's East Village to Divco West Real Estate Services for $207 million in September.

We spoke with Ressler about San Diego's strength in office sales and what he expects to see in 2018.

GlobeSt.com: Why is San Diego is bucking the national trend of decreased office sales volume?

Ressler: The San Diego market came off a slow Q2 2017, and the sales volume increased, from $46 million in Q2 2017 to $830 million, amassed in 15 transactions of properties larger than 50,000 square feet. Investor interest in the San Diego office market remains steady, and we estimate the bid-ask spread between buyers and sellers will narrow and more trades will happen between now and year-end. The market experienced high levels of occupancy gains (total direct vacancy is down to 11.4%, and year-to-date 2017 absorption is down 5% from the previous time frame in 2016) and several high-profile office trades around the market (Divco West closed on the $207 million purchase of Cruzan's Diamond View tower in the East Village, Canadian investor City Office REIT acquired Mission City Corporate Center in Mission Valley and Pacific Corporate Center in Sorrento Mesa from Kilroy Realty for $174.5 million, or $261 per square foot). However, led by only a handful of submarkets in Central County, the change in the market fundamentals is uneven from submarket to submarket.

GlobeSt.com: Do you expect this volume of trades to continue into 2018?

Ressler: Comparing previous real estate cycles, new office development has remained relatively low in San Diego. Most developers are focused on smaller projects and reticent until they receive a pre-lease commitment. Coupled with an expected slowing down of the hiring rate, lack of new job growth and new office supply will eventually reduce this growth. Near-term, we estimate the San Diego economy in general and office market to continue to see slow growth in 2018 since the region's high cost of housing remains the primary impediment to San Diego business formation and hiring.

GlobeSt.com: What do office investors like about the San Diego market over other West Coast markets like the Bay Area?

Ressler: San Diego has several things going for it, and it'll very much depend on how it will be able to capitalize on them. It's already attracting highly skilled professionals and startups looking to get the most for their money compared to the Bay Area. Whether they're looking for class-A, class-B or co-working space, San Diego offers good deals. There is also considerable room and potential for future development should the market witness a significant growth in the coming years. Investors see market fundamentals mostly positive, especially in the San Diego region's booming life-sciences sector.

GlobeSt.com: What else should our readers take away from this research?

Ressler: We see the San Diego market stabilizing and returning to a less-robust status. We do not see any major employment increases in the near future. Until San Diego generates significant employment and office employment gains, it will remain a good stable market, but not one of the five top-tier markets.

Instant Insights /

SD Office Trades Could Escalate Before Year-End

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