Will New Office Builds Create an Oversupply Problem?

There is a total of 762,893 square feet of new office supply in the San Diego construction pipeline. It sounds like a lot for the market, but the recent Colliers International report shows that the market recently the lowest office vacancy rate since 2006. Demand for office space in ever asset class—from A-quality to B- and C-class spaces—is high, and while the construction pipeline is robust, it still doesn’t meet the growing demand.

“Overall, no,” Tim Cowden, SVP at Colliers International, tells GlobeSt.com when asked if the construction will cause an oversupply problem in the market. “There is no concern about that, and we are not over constructing at this point in the market. Lending sources, which is the ultimate deciding factor on what gets built, has not been wide-eyed and crazy like it was in the late 80s or in the early 2000s. New supply coming online is less than identifiable new demand. I think that the suburban markets are in balance right now.”

While the office vacancy rate is 11.4%, tenants looking for large floor plates of 100,000 square feet or more are having an especially difficult time finding space. For that reason, Cowden believes the new supply will be quickly absorbed. “If you have a 100,000-square-foot requirement, you have very few options,” he says. “So, the bigger tenants actually have difficultly being accommodating.”

The suburban San Diego markets are seeing most of the construction action, however, Downtown San Diego, which recently evolved into a healthy office sector, accounts for 60,000 square feet of the new office development. “There is a large-scale project called Maker’s Quarter that is a heavily redeveloping area of the East Village,” says Cowden. “In Downtown Los Angeles, you can’t spec build more than 60,000 square feet. So, the first phase is a six-story, 10,000-square-foot building, and they have preleased a few floors in the office. That is the only spec construction in Downtown Los Angeles.”

The preleasing activity is one sign that there is strong demand for office space. As a result, Cowden expects the vacancy rate to continue to tick down, despite the new supply coming online. “You will see preleasing of the new construction projects during construction, and so I think that the vacancy rate will continue to shrink countywide,” he explains.

Last year at the end of the first quarter, the market had a total of 376,000 square feet of office product under construction.