Small Businesses Drove Negative Office Absorption in San Diego Last Year

San Diego’s office market winning streak came to an end in 2020. After 10 years of straight positive absorption, the market posted negative 877,000 square feet in office absorption last year, according to a recent market report from JLL. Small businesses and users with less than 10,000 square feet of space drove the market losses.

“Of the 877,000 square feet of negative absorption, 88% of that was among tenants under 10,000 square feet,” Tim Olson of JLL tells GlobeSt.com. “That has happened across the country. Small businesses found that it was easier to move our of spaces and let this thing pass. That was the main crux of the negativity in the market. If you look at tenant demand and move-in/move-outs above 20,000 square feet in the county, there was actually positive absorption for the year.”

Many of these small businesses likely just took a pause from the office market rather than leaving or shuttering permanently. This year has already seen a rebound among smaller users. “Instinctually, I think those businesses had tenants works from home and chose not to renew their lease,” says Olson. “Now, they are coming back into the market as office space is open again and the vaccine is distributed. We are starting to see some small tenants coming back to the market. We are seeing more inquiries for office space under 5,000 square feet than we saw all last year. So, a component is company failure, but I think that a lot of those tenants will open offices back up.”

The office losses were also geographically driven, with CBD areas bearing the brunt of the negative absorption and suburban areas actually seeing growth. “We have seen this element in the suburban markets where there is limited supply. We aren’t big new construction markets, so those markets, like north cities and the I-15 corridor, have seen rent growth and stability because there is not an influx of new product,” says Olson. “Anything that has been delivered has been quickly absorbed by tech and life science tenants. That has kept the supply-and-demand metrics in balance through 2020.”

It is important to note that the last time the market recorded a year of negative absorption was directly following the Financial Crisis. However, there are a lot of differences this round. “The difference this time is that the negative absorption is being counterbalance by the tech and life science industry,” says Olson. “A lot of our tenant demand is heavily weighted in the life science segment. In 2021, I think that we will have a positive absorption year based on the leasing activity that we have underway.”