Tech Demand Keeps San Diego's Office Market Steady
Absorption was up in Q3, but leasing down as available sublease space surged to 2.5M.
The tech sector’s appetite for quality office space at scale is keeping total net absorption in positive territory in San Diego, according to JLL’s Q3 market report for the city.
YTD net absorption has ticked up to 387K SF in San Diego’s office market and total vacancies are holding steady at 12%. Owners remain firm on asking rents while concessions stay elevated, JLL reported.
However, leasing activity in the third quarter was down 11% from the quarterly leasing average since the onset of the pandemic, totaling 1.2M SF. Sublease vacancies rose to 740K SF.
MedImpact vacated 158K SF at one of its two HQ buildings in San Diego during Q3, listing the space on the sublease market.
Despite the surge in subleases, landlords remain bullish on direct asking rents, with a YOY increase of 4.3%, according to the report.
“Rather than owners reducing rates in response to rising subleases, direct asking rates continue to hit historic highs. This is primarily driven by hefty concessions, lease restructures or terminations in order to make way for big tech and life science requirements,” JLL said.
As it has in several urban markets, flight-to-quality continued to dominate the office trend in San Diego, with the Class A segment attracting nearly half of total leasing activity.
“Despite evolving hybrid workplace model and a historically high sublease availability rate of 3%, totaling 2.5M SF, overall office market sentiment remains optimistic,” JLL said.
The office market in San Diego is being buttressed by strong tech demand for office space—and by lab conversions, which are reducing office inventory. The sustained growth of the professional and business services sector in SD has surpassed pre-pandemic levels, adding 14,300 jobs YOY, potentially translating into addition demand for office space, the market report said.
The adjacent UTC and Eastgate submarkets continued to outperform thanks to the tech sector, whose presence also is emerging in Rancho Bernardo and Sorrento Mesa, JLL said.
The current office construction pipeline in San Diego remains primarily concentrated in Downtown, with no pre-leasing in a majority of new projects under development in the market. JLL projects that no speculative office projects will break ground in San Diego in the immediate future.
A significant amount of available space from both sublease and spec construction delivering in the next 6 to 24 months, mostly in Downtown, may deter developers from moving forward on proposed new projects, JLL said.