Fresh Opportunities for DTSD Creative Space

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SAN DIEGO—Obsolete office space that's often overlooked is providing new opportunities for creative and tech companies to locate in Downtown San Diego, Newmark Grubb Knight Frank senior managing directors Brent Bohlken and Ron Magnaghi tell GlobeSt.com. After the release of the firm's Q2 office report for San Diego, we spoke with the pair about key takeaways from the report and trends in the office sector here.

GlobeSt.com: What's driving investment sales in the San Diego office market?

Bohlken: Key drivers for the investment-sales market are low interest rates and a very low supply of available product. The low supply is further aggravated by the fact that we have had very little new construction over the past 10 years. Additionally, the construction costs have increased to a point where only sites that can command premium rents can be built. Right now, San Diego has a very low buildable land supply. At the end of the second quarter, the two submarkets that are under construction on some significant square footage include UTC/Eastgate (approximately 1.1 million square feet) and Carlsbad (approximately 233,000 square feet).

GlobeSt.com: What do you see as the next emerging submarket for office sales in San Diego?

Bohlken: Carlsbad has been the hot submarket over recent months; however, I believe that Sorrento Mesa will be the next submarket to move. Sorrento Mesa has had an abundance of tech and life-science companies, a central San Diego location and buildings that have the potential to add value through renovation and repositioning to appeal to the growing user base there. We have already seen capital coming in that has sparked the creative-office and life-science conversion, and that will continue on through at least the end of 2016.

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GlobeSt.com: As the Downtown market continues to strengthen, how will pricing be affected there and in other submarkets?

Magnaghi: Over the past decade, Downtown San Diego has been transforming into a dynamic residential community that, in turn, stands to benefit retail, restaurants and the traditional business core, which is Downtown's history. There is so much residential construction going on, which has largely been attracting Millennials and Baby Boomers who want to live in an urban environment. This residential renaissance is building a workforce of Millennials for tech and start-up companies. The East Village is a prime example—young people are everywhere, and they want to work near where they live. I don't see the growth of these Downtown creative and tech companies affecting other submarkets yet. These users are filling older warehouse and loft space that your traditional Downtown tenant—such as accountants and attorneys—wouldn't target.

GlobeSt.com: What else should our readers take away from your most recent San Diego office report?

Magnaghi: The big story is that class-B and R&D space is getting absorbed quickly because of conversion to creative-office space for the tech as well as life-science sectors. This older, slow-moving, obsolete space is being transformed, and it is being hit from both of these growing sectors, which is really tightening up the market and changing the office landscape. As class-A office rates rise there will be even more pressure from other companies to seek class-B space. With the cost it takes to transform these older buildings, owners significantly raise rents. When all is said and done, some of these spaces can end up being even more costly than class-A spaces.