San Diego's office market won't pick up through the end of the year. Research director Chris Reutz of Colliers International expects the market to remain quiet through the end of the year.
"Overall, the rest of 2020 will be relatively quiet for office leasing. The ongoing COVID-19 pandemic has created an immediate effect on demand with potential for future challenges, as many companies considered "non-essential" require their workforces to continue working from home," says Reutz. "Considerations for office users, operators, and owners will not only need to contend with the immediate effects of the COVID-19 aftermath on their businesses, but the long-term effect on office workplace culture, work style and space utilization."
This will have a negative impact on both vacancy and absorption activity. "By year-end, it is likely that direct and sublease vacancy will tend to increase steadily as net absorption posts additional negative demand. Asking rental rates may continue to see minimal decreasing, but will likely stabilize early next year," adds Reutz.
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While the market will continue to face downward pressure on demand, Reutz is encouraged by the life science market. "With San Diego being the third largest life science market in the country, we are a hub for innovative biotech and life science companies," says Reutz. "Now more than ever, those companies will continue to expand as need for their products and technologies are in even greater demand."
This demand has fueled office conversion activity to create more supply. "This industry's growing demand has drawn interest for additional inventory being converted from traditional office space as well as a focus on seeking alternate submarkets for new development," says Reutz. For example, Alexandria Real Estate Equities purchased office buildings in Torrey Pines, Sorrento Mesa and Sorrento Valley for conversion to life science space. An opportunity for as much as 1.3 million square feet of new life science space to be constructed in Downtown San Diego has become available through an acquisition by IQHQ REIT of the former Manchester Pacific Gateway mixed-use project," added Reutz. "That project has the potential to create for the first time a brand-new life-science cluster outside of the San Diego Golden Triangle and the North City."
These deals are continuing and happening in several markets throughout the San Diego market. "In UTC, Alexandria also is partnering with Regency Centers to renovate the Costa Verde Shopping Center into a mixed-use retail hub with an additional 400,000 square feet of tech/R&D space," says Reutz. "Construction on this new Costa Verde Life Science Campus is expected to break ground by mid-next year."
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