Hoeck: “[The San Diego office market] should be more sustainable and healthier than it's been in past cycles, even if it doesn't reflect that statistically.”SAN DIEGO—Controlled post-recession company growth has produced a less-volatile, but steadier San Diego office market that is more prepared to weather any future economic downturns and benefit from recently implemented tax cuts, CBRE SVP Mike Hoeck tells GlobeSt.com.

According to a Q4 2017 office report from the firm, the San Diego office asking rate fell slightly by $0.01 (-0.2%) quarter-over-quarter but increased $0.06 (+2.3%) year-over-year. Also, vacancy increased slightly by 30 bps in Q4 2017 to 11.3%, although the rate has remained below 12% for five consecutive quarters. In addition, net absorption was negative (-154,006 square feet) in Q4 2017 after five consecutive quarters of positive absorption, with year-to-date absorption at 482,241 square feet.

We spoke with Hoeck about these figures and what they mean for the San Diego office market now and looking ahead.

GlobeSt.com: It looks like fundamentals for San Diego office are not as strong as they had been. What are the headwinds for this?

Hoeck: San Diego had a slightly below-average year in terms of absorption for the office market, but we do stand at historical asking rates. There are lots of positive things happening in the market as well. As far as larger occupants of office, CEOs are pretty bullish on the market and specifically office, and job growth drives the office market. Apple is making a $350-billion investment back into the US, and we're hearing from other CEOs and office occupiers that the new tax cuts—love them or hate them—have been good for business. CEOs are pushing to put a little more money in their R&D spend. We're teetering on the edge of a historic run in terms of office-market absorption, and based on what we're hearing from CEOs, job growth is going to continue. Unemployment is at 3.3%, so it's hard to believe we could get tighter and healthier than that, but everything points to positive momentum going forward.

Twenty-fifteen and 2016 were incredible years for the SD office market, so to be able to match those years in 2017 was difficult, and it will be difficult for 2018. One challenge is a lack of great inventory of office buildings. San Diego has a lot of what I call obsolete buildings that, generally speakin,g occupants of office space don't want. It's older, commodity space that can only compete on price. These obsolete buildings make up a large majority of office vacancy countywide. Because there's not a lot of new shiny inventory in the office market, users out there can't find what they're looking for, and it's a function of having good product out there in the market.

Since 2009, the office market has added about half the inventory that it's done in the last two cycles, so there are no new buildings for people to go into. Downtown San Diego just broke ground last year on its first new building in the last 11 to 12 years, and what we're adding now is just a drop in the bucket.

GlobeSt.com: What can we expect from the office sector as we move closer to what experts expect to be a recession by 2020?

Hoeck: Each sector is different, but CEOs will continue to be bullish on job growth. The Great Recession was not that long ago, so companies are being very strategic and thoughtful in their growth. Everything that's been happening since the recession is a little more subdued, and that hasn't changed. As a market as a whole, this is a great thing. Companies were doubling overnight only to let people go, and we're not seeing that now. It's a hedge against the ballooning of sublease inventory that could hit the market.

Regarding the different office sectors here, the defense sector is arguably as strong as it has been in terms of sequestration and temperament of CEOs. With tech, VC software funding was at its highest level ever in 2017, and life science funding was on par. It's a good sign for the tech market going forward. Action sports has been a steady Eddie force in San Diego that continues to evolve, and the entrepreneurial sector continues to do well. The telecom industry and the likes of Qualcomm have lots of question marks around them; six out of 10 major semiconductor firms have presence in the San Diego market. Regardless of what happens with Qualcomm, we will continue to fare well with job growth. Healthcare is another big office sector here, and as the Baby Boomers age, we will continue to need more healthcare.

GlobeSt.com: How is San Diego protected from a market downturn, can the region hedge against one by responding differently now?

Hoeck: Diversity of industry in San Diego is obviously great for us. We've had historical numbers from a vacancy and rent-growth perspective; compared to San Francisco and San Jose, our highs are not as high and our lows are not as low, so we're more consistent even in a downturn. We can hedge against a downturn by investing in our universities with grants and funding. We need to retain that talent coming out of UC San Diego by making a reinvestment in that university, as well as USD and State and Point Loma. We believe San Diego is doing the right things to do that, but we need more affordable housing. One of the big detractors in retaining these students is housing or a lack thereof.

Also, jobs: our universities have not been spitting out the right kind of employees that San Diego employers need, but they're now starting to support this more, especially USD and UC San Diego. The tech industry saw historical record VC funding year in 2017, and we don't see this slowing down. San Diego has lacked a strong robust tech industry, and with the VC money coming here and modifications in programing at UC San Diego, State and USD, we are on the right track to have that link between the student, degrees produced and industries here. There's more cohesion on that front.

GlobeSt.com: What else should our readers take away from these overall figures?

Hoeck: In past cycles, I feel like we have experienced, as far as what we're seeing with employers, a less-strategic growth plan. This time around it's been different, with a little more cautious in approach, so this should ultimately result in a better long-term outcome for the San Diego office market. It should be more sustainable and healthier than it's been in past cycles, even if it doesn't reflect that statistically.

Instant Insights /

SD Office Fundamentals Don't Tell the Whole Story

Related Stories

Recommended For You