When it comes to San Diego's office market, there is good news and bad news. The good news: the metro's robust life science and technology sector will help to fuel leasing activity this year and drive the office recovery. The bad news: the office vacancy rate is at a nine-year high, and new construction deliveries in Downtown San Diego will push vacancy rates higher this year.
Marcus & Millichap research shows the office vacancy rate in San Diego is 16.1%, a 380 basis point increase from 2019. The class-A vacancy rate is even higher at 20.8%. Marcus & Millichap expects the rate to continue to grow another 140 basis points this year to 17.1%, the highest rate since 2009. The cause is largely due to several speculative office developments scheduled to deliver in Downtown San Diego this year. The CDB already has a 26.2% vacancy rate, and the new construction will increase the stock by 2.3%. In addition, another 750,000-square-foot project is schedule to come to market in 2022.
Still, there is plenty of room for optimism. San Diego is one of the largest life science hubs in the country, and the sector—along with technology—will likely help to fuel office leasing this year. It's already starting. The Marcus & Millichap report notes a 40% increase in lease executions in the first quarter compared to the fourth quarter 2020. Biotech and software companies were responsible for the surge.
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Life science and technology leasing activity will help drive the office recovery in select submarkets, namely Sorrento Valley, UTC and Torrey Pines. In the first quarter, Element Biosciences and TuSimple leased a combined 200,000 square feet in the market, while Google announced it will expand its footprint in the submarket.
While there is s split outlook on leasing activity, Marcus & Millichap predicts and increase in rents this year by .7%. The report notes that this is nominal, but a good sign for the market's recovery.
Prior to the pandemic, the San Diego market had been on a growth streak. That ended when the market recorded 877,000 square feet of negative absorption in 2020, according to research from JLL. In keeping with the theory that major life science companies will support the office recovery, decreased in leasing stemmed from small businesses. Tim Olson of JLL told GlobeSt.com in an earlier interview that 88% of negative absorption came from tenants occupying less than 10,000 square feet. He said, "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."
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Kelsi Maree Borland
