Two Industries Lead San Diego’s Office Market

Two industries are leading San Diego’s office market: life science and defense. Since 2017, the two industries have accounted for 3 million square feet of leasing activity, according to research from Cushman & Wakefield. Life science is the overall leader. San Diego’s office market has an 11% vacancy rate. For life science, however, the vacancy rate falls to only 6.25%. With increased funding from congress and venture capital interest, these two industries are poised for even more growth in 2019. That will have a big impact on San Diego’s office market.

“As of the third quarter 2018, San Diego’s office market consisted of close to 78 million square feet of product, sitting at 11.0% direct vacancy. In comparison, San Diego’s life science market consists of almost 19 million square feet, sitting at an astounding 6.25% direct vacancy rate,” Brian Starck, executive director

Cushman & Wakefield. “Digging a little deeper into the vacancies for life science product, most of the large block vacancies in San Diego’s core central submarkets are old second generation product that are not currently in a condition to attract and retain top talent, pushing the direct vacancy rate even lower for quality space than what is recorded. When analyzing true competition between spaces, the supply of premium space is far less than the demand and therefore resulting in higher rents.”

While life science is certainly leading the market, defense is still a major industry in the market and a major office user. “Defense industry/federal government is the biggest customer of the tech industry in the region, particularly for technology advanced naval, aviation and communication sectors of the military establishments and therefore plays a significant role in supporting San Diego’s tech sector,” Jolanta Campion, director of research for San Diego and Nevada at Cushman & Wakefield, tells GlobeSt.com. “Technology industries have been the single-leading industry sector in San Diego the last several years, and it is continuing to grow. Since 2017, technology tenants overall have leased approximately 3.8 million square feet of space countywide, split by nearly 2.6 million square feet of office space, and more than 1.2 million square feet of industrial classed space.”

In the last two years, the two industries have be major drivers of leasing activity, with life sciences leasing 2 million square feet since 2017 and defense accounted for 1 million square feet of leasing activity since 2017. “During the same period, there was more than 2 million square feet of industrial product leased between the Defense and Life Sciences sectors: 1.25 million square feet from life sciences and 853,000 square feet from defense. All of this activity combined equates to more than 5.2 million square feet square feet of leasing activity in just under two years’ time in these two sectors alone,” says Starck.

The long-term trend of activity has meant great growth for San Diego’s office market. “Overall employment in San Diego has exceeded a 28-year annual average of 18,400 for the last seven years, from 2012-2018, adding a combined 240,000 jobs during this time and is forecasted to grow 1.9% in 2018 and 1.4% in 2019,” adds Campion. “As of October 2018, San Diego has added 26,000 jobs year-over-year and about half of those jobs are office-using (equating to an estimated 2 million square feet of absorption. “Office-using employment is forecasted to grow 1.6% in 2019. San Diego’s office leasing fundamentals are still tightening, bucking the national trend.”