Will the Tight Supply of Core Office Product Stall Sales?

The San Diego office market is on fire. According to the latest research from CBRE, the market has surpassed pre-recession levels of vacancy rates. While this definitely bodes well for the leasing market, it has also fueled investment activity. According to Natalie Dahl, the newly named managing director of investment services in San Diego, there is deep investor demand for core assets and activity is expected to remain strong through the end of the year. The only challenge, however, is the limited supply of quality core assets in San Diego.

“Inventory of core assets looks to be light in primary markets throughout the West Coast for the remainder of the year; including San Diego, suggesting owners have a positive outlook on the overall market,” Dahl, who joined the San Diego office this month from CBRE’s San Francisco office, tells GlobeSt.com. “Demand on the other hand is deep, as investors look to place remaining capital commitments for the year. Core and core plus opportunities, with some credit, will continue to generate competitive bids among investors.”

Strong office fundamentals in San Diego are behind the surge in investment activity. San Diego has a diverse landscape of office tenants and growing industries, like life and bioscience, which are all contributing to the healthy market dynamics. “We are seeing strong investor interest in San Diego due to great fundamentals and an attractive long-term outlook for the region,” says Dahl. “Office vacancy is at pre-recession lows with steadily raising rental rates, and we are seeing positive net absorption alongside construction activity at a four-year high. All this is fueled by the region’s abundance of top talent in areas such as engineering, computer science, bioscience and business university programs. San Diego is the number one patent intense region in the U.S. and ranks third in the world. It also boasts one of the highest concentration of life sciences lab space in the U.S. This is causing high-growth companies to strongly consider San Diego in their potential expansion plans due to the region’s highly skilled workforce, the abundance of venture capital investments and its high quality of life.”

Better yields have also helped to drive investment demand in San Diego. Although prices have climbed in the last year, the market remains a discount to other West Coast office markets. “With limited investment opportunities, pricing is five to 10% above the last peak and focused on San Diego’s key submarkets and class-A buildings,” says Dahl. “San Diego also offers comparative value in relation to many other West Coast markets that have seen record pricing.”