Traditional, Not Tech, Users Are Ruling San Diego Office

Technology tenants may be getting more than their fair share of credit for office leasing activity. A new report from CBRE that tracks office leasing deals 10,000 square feet and larger reveals that traditional tenants are responsible for the vast majority of office leasing activity in the market. Aerospace/ defense and business services had the biggest increases in leasing activity for the quarter, together accounting for more than half of the leases signed in the market. The two industries also showed year-over-year increase in leasing activity. Technology, on the other hand, accounts for only 6% of the leases signed, showing a significant drop in activity over last year. We sat down with Matt Carlson, SVP at CBRE, to talk about office leasing trends in the market and why technology tenants are really getting so much attention.

GlobeSt.com: There is so much focus on technology and creative companies in the office market, but this recent report shows that the majority of leasing activity is coming from more traditional users. Why do you think there is such a focus on tech and creative users?

Matt Carlson: The majority of the existing building tenants are traditional office tenants. You have the bread-and-butter that has always been the San Diego office market, and that isn’t going to go away. There are a percentage of new creative technology deals that come into the marketplace, but even a couple of small percentage points is a massive change to the marketplace. So, I think that where we are seeing growth and improvement is in the creative tenants, and even if it is only a small percentage, it ends up being a big headline piece.

The other thing is that traditional office tenants are trying to come up with a new work environment. The creative is pervasive among all of the office clients, with the exception of the legal services segment. You are starting to see the effects of what the technology class wants to see in their space in the traditional office. That is why you are hearing the headlines more of the tech and creative tenants.

GlobeSt.com: One chart in the report shows huge increases in aerospace/defense, business services and financial service leasing activity this quarter, but a drop in technology leasing activity. What do you think drove this change in activity?

Carlson: I think that you are looking at a snapshot in time. 2017 saw a handful of new technology-focused companies. There were a couple of big monumental-type deals that really drove it. I think that we are going to see the same in 2018, but those deals don’t happen every single quarter. As far as the defense contractors go, the current administration is driving defense, and it has percolated down so that the defense contractors are winning more business, and we are going to continue to see that. We are already seeing it in the marketplace with the expansion of some of the bigger government contractor groups across the county.

GlobeSt.com: How are owners responding to these trends in leasing activity?

Carlson: Owners are spending a lot of capital, and they are repurposing and repositioning buildings and trying to differentiate their product from other buildings. There are a lot of people that are trying to develop product that isn’t a building envelope, which is where you walk into a building and don’t breathe outside air until you walk to your car. Owners are spending money on rooftop spaces, indoor-outdoor spaces, patios, contemplation gardens and hyper-amenitizing. They are doing whatever they can to make themselves look better than the traditional building to land that next exciting tenant.

GlobeSt.com: What is your outlook for leasing activity and trends this year?

Carlson: I definitely think that you are going to see significant absorption from the defense industry. All of our defense contractors are chasing contracts and continuing to take up space. I also think that you are going to continue to see submarkets that are dense and quasi-urban do extremely well. UTC with the trolley coming and the adjacency to UCSD and walkable amenities and apartments is going to fair very well. Mission Valley and Downtown will also fair very well. The submarkets with a large amount of government contractors are going to do well. I also think that you are going to continue to see Sorrento Mesa because that is the one place in the county where there are a lot of large blocks of space. From a statistical standpoint, Sorrento Mesa has a long way to go. I think you will see deals there, but statistically, it will have some challenges.