Tim Olson

UTC, Eastgate and Del Mar Heights led office leasing activity last year in San Diego. According to a new report from JLL, the San Diego market had nearly 770,000 square feet of net absorption in 2019 with demand concentrated in those three submarkets. Of the nearly 726,000 square feet in new development, 90% is already preleased.

"Those markets are in a central location for employees," Tim Olson, market lead and managing director at JLL, tells GlobeSt.com. "A lot of our higher quality and new product is also in those market segments. If you look at the industries where we have seen robust growth over the last year or last two years, it has really been our tech and life science sectors. Those three markets tend to play off of one another as far as the flow of tenants. The life science growth has been primarily in the UTC, Eastgate, Campus Point and Sorrento Mesa submarkets, and in Del Mar Heights, absorption has been in the class-A buildings but also in the new spec construction that is being delivered."

While tenants are landing in this northern market cluster, life science and tech expansion are driving overall office leasing in San Diego. "It is definitely leading the market. The story has really been that the life science growth over the last two years is really removing a lot of the office inventory from the market," says Olson. "If you look at a market like Sorrento Mesa, over the last two years, there has been more than 1.2 million square feet of office product that has been taken out of the office inventory and being converted into life science product. That is having an indirect impact on the tightening office market dynamics."

Class-A space has seen the most demand from these users, and as a result, there is a supply shortage of quality space in large floor plates. "We are seeing a huge dwindling county wide in class-A space. In those three submarkets alone, if you look over 30,000 square feet, I think you have seven class-A options that exist," says Olson. "In those three submarkets, you don't have a single option over 100,000 square feet. Companies are going to have a difficult time growing in San Diego, but we have seen a big increase in demand from larger users moving into the market."

The supply shortage isn't severe, but it is creating challenges for tenants looking for spaces in larger blocks or looking to expand. "It is having a direct impact really countywide," says Olson. "It isn't widespread that tenants are having trouble finding spaces, but if you are looking for anything over 30,000 square feet, then you have less and less options, especially in the central markets."