Count on Strong Second Act in San Diego Office

Office absorption in San Diego did not live up to expectations in the first half of the year, according to research from Cushman & Wakefield. While leasing velocity was slow in the first half of the year, researchers expect an increase in the second half. The second quarter of 2018 was the best second quarter in the last five years, which bodes well for momentum in the second half of the year. With several leases already signed on new construction projects—which won’t be counted until the users take occupancy—it is likely the year will close strong.

“Although our mid-year office growth figure of 342,000 square feet was a bit shy of the 552,000 square feet seen during the same period in 2017, we have observed over the last several years that the second half of the year has typically proved to be the workhorse when it comes to producing robust growth levels,” Jolanta Campion, San Diego research director at Cushman & Wakefield, tells GlobeSt.com. And through the remainder of 2018, there are several large tenants expected to occupy, bolstering absorption in future quarters.”

The most significant leases to close in the second half of the year are in Kearny Mesa and Sorrento Mesa. Some of the major leases include UC San Diego will occupy 82,000 square feet; Trellisware is set to occupy 72,000 square feet at the newly renovated Summit Pointe in Scripps. “ServiceNow signed a direct deal to expand into a 64,000-square-foot building, currently subleased by Kratos and Plaza Home Mortgage—Kratos will be moving to 26,000 square feet in Scripps in quarter four while Plaza Home Mortgage will occupy 55,000 square feet at Verge in Sorrento Mesa,” adds Campion. “Also in Sorrento Mesa, Nuvasive plans to expand into another 107,000 square feet, including the construction of a new building. Neurocrine Biosciences leased a 45,000 square feet building in Del Mar Heights. Bank of Internet renewed their lease at the Plaza in UTC, and will also expand by 60,000 square feet over the next year. Fate Therapeutics also signed a lease to expand at their location in Torrey Pines by 24,000 square feet.”

Brett Ward, managing director of Cushman & Wakefield’s Office Division, echoes the impact of new construction leasing activity in the second half of the year. “Carlsbad-headquartered ViaSat is expanding its footprint,” he tells GlobeSt.com. “The company’s new Bressi Ranch site is planned for a total of approximately 800,000 square feet at build out, 357,000 square feet of which is scheduled to complete in 2018. Additionally, in Eastgate Takeda Pharmaceuticals has its build-to-suit totaling over 163,000 square feet, and Palomar College is also expected to occupy its 110,000-square-foot build-to-suit in Rancho Bernardo in 2018. Additionally, MedImpact will occupy the first of three buildings at the Watermark in Scripps for 159,000 square feet, and UCSD has two projects currently under construction, a 57,000-square-foot project in Rancho Bernardo and a 66,000-square-foot project at Park + Market Downtown.”

This leasing activity already completed aside, the San Diego market has strong demographics that will help to drive new leasing activity and move-ins in the second half of the year, and that also bodes well for increased activity. “Our ongoing job creation in combination with increasing tenant demand should provide continued occupancy (and rent growth) throughout 2018 and into 2019,” says Ward. “Our active tenant requirement pool remains robust totaling 3.6 million square feet over the next 24 months, with a diverse tenancy of life science, technology and professional & business services, financial activities, and government industry sectors leading the way. While not all occupiers in the market will transact in the short term, these levels do at least provide a good sense of what direction the market is moving ahead.”