San Diego Office Market Begins to Rebound

The San Diego office market is beginning to show the early signs of recovery. In the second quarter office absorption moved into the black and was double the absorption from the third quarter 2020, according to a report from JLL.

Class-A office has 154,011 square feet of net absorption, fueled largely by tech companies leasing space in Eastgate, Del Mar Heights and Rancho Bernardo. Those three markets also have 526,000 square feet of new tenant move-ins scheduled for later this year, which will help to further drive leasing velocity. In addition, the sublease supply fell 30 basis points, now accounting for about 2.5% of the total office leasing market. Together, this activity points to a slowly recovering office market.

In addition to improved leasing activity, direct asking rents also increased in the second quarter, up to $3.25 per square foot. This increase was largely due to new office deliveries and the conversion of dated properties into biotech space, a trend that has reduced office space by 1.1 million square feet since 2019. Class-A rents increased 3.2% year-over-year, driven by activity in UTC, Sorrento Mesa and

Downtown. The upward trend in rents should continue, with another 1.1 million square feet in biotech conversions scheduled in 2022.

The report wasn’t all positive. Year-to-date absorption is still negative 158,857 square feet. The vacancy rate is the highest sine 2013 at 14.3%. And although direct asking rents are rising, overall concessions are also up.

This activity is a major improvement from early this year. A first quarter report from Marcus & Millichap pegged the San Diego office vacancy rate at a nine-year high at 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 speculative office construction, and the report expects the vacancy rate to continue to grow thanks to new construction deliveries in Downtown San Diego.

JLL’s forecast, on the other hand, is positive for the remainder of the year. As workers return to the office, JLL expects leasing activity to continue to improve. Tenant demand for office and lab space has increased 55% year-over-year to a record high of 7.6 million square feet, which should also help to drive leasing and net absorption in the second half of the year.