Carlson: “[Office is] not as tight as retail and industrial, but it never gets tighter than those other sectors.”SAN DIEGO—With 2016 seeing massive San Diego office absorption, leaving little available space for lease in 2017, it only seems as if the office sector paled in comparison to industrial and retail's robust numbers, CBRE SVP Matt Carlson tells GlobeSt.com.

The firm's Q4 2017 office reports reveal that 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 and that vacancy increased slightly by 30 bps in Q4 2017 to 11.3%. The rate has remained below 12% for five consecutive quarters.

Also, the net absorption was negative (154,006) square feet in Q4 2017 after five consecutive quarters of positive absorption. Year-to-date absorption was 482,241 square feet. Two new office projects broke ground in Q4 2017—the Watermark in Scripps Ranch and Lift in Carlsbad—adding space to the market.

Meanwhile, the reports show that the retail market in San Diego continued to trend positively in Q4 2017, with average asking rates increasing $0.03 quarter-over-quarter to $2.32 NNN, the highest rate since the recession. Retail net absorption remained positive in Q4 at 177,095 square feet, bringing year-to-date net absorption to 490,235 square feet. Due to strong net absorption, total retail vacancy rates declined 30 basis points quarter-over-quarter to 4.5%, while high leasing activity drove down total availability to 7.4%. There was also a substantial increase in retail leasing activity, which reached 763,995 square feet in Q4, but year-over-year retail and food service employment remained slowed at 0.6%.

The industrial sector here was also robust during Q4 2017, according to CBRE's reports. Net absorption surged in Q4 2017, surpassing 1 million square feet. In total, 1,716,603 square feet was net absorbed in 2017. The overall vacancy rate decreased sizably quarter-over-quarter, dropping 40 basis points to 3.9%. Vacancy and availability rates are now at a post-recession lows.

Average asking rates for low-finish industrial product increased quarter-over-quarter by $0.03 to a post-recession high of $0.90 NNN. High-finish product increased $0.05 quarter-over-quarter to $1.43 NNN, also a post-recession high. And industrial construction activity continued to boom relative to recent years since eight new buildings broke ground in Q4 2017. Overall construction activity totals more than 3.4 million square feet as of year-end 2017, a post-recession high.

We spoke with Carlson about the apparent disparity in strength between office and the other sectors and whether the numbers tell the whole story.

GlobeSt.com: It looks like office is not as strong as industrial or retail right now. Is this true, and if so, what are the headwinds for this?

Carlson: I wouldn't say that office is falling backwards or not as strong. There are a few things going on. The first is that industrial is very strong right now for a lot of reasons. Big-box industrial, which we don't have a lot of, is obviously affected by Amazon and the automated universe, and last-mile space is doing really well here. As far as retail in San Diego, experiential and neighborhood retail is always very tight.

I think what you're seeing in the office market is that it's also very tight. It's not as tight as retail and industrial, but it never gets tighter than those other sectors. There's always a bit of a glut with space that's functionally obsolete or doesn't work; it kind of sits. And 2016 was a massive year for office absorption. A bunch of new product was delivered to the market: Kilroy delivered a building in Del Mar Heights, Irvine Co. delivered a building in UTC and American Assets also delivered a building in Del Mar Heights. When these buildings are delivered and leased up, there's a bunch of absorption and a drop in vacancy. In 2017, there wasn't a lot of space open to lease since we had just come off a massive year in 2016. We didn't deliver as much product in 2017, so we didn't see the statistical advantage relative to the other food groups.

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

Carlson: A lot of people are trying to figure out what could get us into trouble. In the previous recession, it had a lot more to do with the financial markets and people overborrowing, so money dried up pretty quickly. Right now, there's so much capital out there chasing deals that that's not going to happen. The only financial issue we're all watching is interest rates. They're starting to rise, and that changes leverage on products. But lenders and equity have been very disciplined. Capital is not going to dry up. The fundamentals look pretty good, and the labor market looks pretty strong, but a Black Swan event could plunge us into recession. Conversations about trade wars indicate that this could potentially cause it. But we're seeing a lot of businesses expand, and we're out there on the front lines looking at indicators every day. Things are still going well, and if the employment market is going well, people are spending money. The market is healthy, and outside of a Black Swan event, there's nothing on the horizon to suggest that 2020 is the year we will see a recession.

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

Carlson: In the last recession, there was over-inflation of the housing market, but lenders aren't preying upon borrowers like last time. If the housing market is protected, there could be a slowdown in housing and net worth, but we're not seeing much default. I'm seeing a lot of Department of Defense investment here, and that drives close to $30 billion of our GDP. With conflicts around the world, we will see a lot of expansion in DOD. We also have diversification in the biotech market—when drugs come out and are super successful, we're immune somewhat to what we see in a recession environment. Those drug companies are going to make money regardless of what's happening in the economy. The Qualcomm situation may impact us, but housing, defense and biotech fare fairly insulated, which is different than last time.

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

Carlson: You need to have perspective. These reports are merely snapshots in time, that's all they are. 2018 is off to a strong start. Businesses are doing well, brokers are busy and active, and we have a lot of product trading hands this year. A lot of businesses looking to expand their facilities, so we're bullish on 2018.

Instant Insights /

Office is Stronger Than the Numbers Might Suggest

Related Stories

Recommended For You