San Diego Office Rents Climb to Record Heights

San Diego rents have reached record heights. According to research from Newmark Knight Frank, office rents in the market have increased 22.8% since 2013. In the third quarter, class-B rents drove the rent gains, increasing 3.6% this year, while class-A rents increased 2.5% during the same time frame. These rent gains have been driven by both the redevelopment of office properties and organic tenant growth.

San Diego landlords have actively been redeveloping out-of-date office properties throughout the market. This activity has fueled the growth of class-B rents. “There has been a reinvestment of capital over the last few years into older buildings to bring them up to today’s standards, and there is more of a progressive feel across the board,” Christopher P. High, senior managing director at Newmark Knight Frank, tells GlobeSt.com. “That reinvestment is pushing rents to get returns but also pushing rents because it creates a better and higher end environment, and that is something tenants are willing to pay more for. We have seen that trend across the county, not just in certain submarkets. The entire tide is rising based on the quality of real estate.”

While redevelopment has been a major trend in the market—keeping office construction in check—High says that these redevelopment projects have not been exclusively creative conversions. “We have seen a more progressive approach to all office space,” he explains. “Landlords and tenants are looking at impact areas within office spaces to create unique environments, like lobbies, kitchens and gathering spaces. We are seeing that across the board in flex conversions, creative conversions and traditional office space.”

In addition to office redevelopment, tenant growth has also played an integral role in rent growth. This includes both expanding companies and companies migrating to the market. “There has been a lot of growth in San Diego’s tenant base,” says High. “We have seen organic growth in the existing tenant base as well as a new influx of people into San Diego. Through the fourth quarter and through the end of the year, we are going to see a few new and very high notable tenants that we have not seen previously.”

While High couldn’t be specific, he said to expect well-known Fortune 100 companies to enter the market next year.