DTSD Office Projects Move Forward as Leasing Activity Slows

Downtown San Diego has posted negative office absorption negative year-to-date, but despite the slow leasing activity, there are still several office repositioning projects underway in the submarket, according to a new report from JLL. Much of this repositioning activity is focused on bringing creative office space to the market—which has historically had more of a traditional supply. This could mean a slow down of new project starts and an unclear outlook of the Downtown San Diego office market next year.

“Approximately 80% of Downtown’s negative absorption year to date—negative 259,000 square feet—is due to the city and all other tenants moving out of 1010 2nd Avenue, which is now being redeveloped to a class-A building named Tower 180,” Scott Schindler, a broker at JLL, tells GlobeSt.com. “If we remove this exodus from the overall equation, then absorption is relatively flat.  Another factor is smaller tenants are densifying in order to cope with higher rental rates and to contain occupancy costs.”

Currently, the market has an 11.2% direct vacancy rate with negative office absorption for three straight quarters. Schindler says that new office projects have continued as leasing statistics have trailed investment decision making this year. “Statistics are trailing, and decisions from Downtown property owners to invest capital of this magnitude were made over the past few years,” he says. “The push to reposition these properties is primarily to cater to the creative office needs of tech companies seeking to attract and retain high-demand millennial talent.”

Downtown San Diego has been a revitalization project for years. Both office and residential developers are bringing supply to the market, and overall, the demographics there are slowly changing. “Our Downtown tenant base is more diversified than ever, with shorts and flip-flops riding the same elevators as suits and ties,” says Schindler. “Tech companies are attracted to Downtown because that’s where millennials want to live, work and play.”

Still, the diversity in office users and the new quality supply might not be enough to carry San Diego through 2019. “For the first half of 2019 we are expecting moderate demand for office space in Downtown, but the second half is not so clear,” says Schindler. “Some of our brokers are projecting a flattening out of pricing in the second half of 2019. With this potential decrease in demand and approximately 550,000sf of new office supply coming online, there may be downward pressure on rental rates, but cycles are inevitable and we have seen 8 consecutive years of pricing appreciation.”