Why Suburban-Office Builds Increased in SD and OC

SAN DIEGO—Soaring rental rates, plunging vacancy rates and a lack of land for development opportunities in the central business districts of Orange County and San Diego have forced developers to look outside the urban core to build office product, CommercialCafe's director of business intelligence Doug Ressler tells GlobeSt.com. According to a recent report from the firm, suburban offices will provide the largest amount of new space to the US office market, with nearly 35 million square feet scheduled for delivery in 2018.

According to the report, in Orange County, Tustin is slated to add one of the largest segments of office space to the market in 2018 with 417,000 square feet, a 28% increase of the city's office inventory. Meanwhile, San Diego will add four projects totaling 609,913 square feet of office space to the market, only 53,000 square feet of which will be in the Downtown submarket.

We spoke with Ressler about the shift to suburban-office construction in these markets and his expectations for this trend in the longer term.

GlobeSt.com: What has led to the shift toward suburban-office construction in Orange and San Diego counties?

Ressler: We believe this change to have several causes. First, the Orange County rental rate soared while vacancy dropped to the lowest level on record in the third quarter of 2017 (current vacancy is at 10.8%). In San Diego, the current vacancy rate is at 12%. Then there is the issue of the lack of land for development opportunities in central business districts (only 53,000 square feet at Makers Quarter is scheduled for delivery in San Diego's CBD). With the push from the growing med-tech industry, especially in the Torrey Pines submarket, the shift towards suburban markets is a logical step.

GlobeSt.com: Which geographic areas of these markets fare best with suburban-office construction?

Ressler: In Orange County, it is strictly the Irvine market, which will deliver four major projects next year: the Boardwalk, with 550,000 square feet, the Launch, at 130,000 square feet, Flight at Tustin Legacy, with 417,000 square feet and projects in Irvine Spectrum at 1,027,116 square feet.)

In San Diego, office construction is in four principal areas: 170,000 square feet being added in Torrey Pines, 75,000 square feet added in the I-15 Corridor, 230,000 square feet in Kearny Mesa, and 165,000 square feet in Mission Valley.

GlobeSt.com: What are your expectations for suburban-office construction volume in these markets over the next year or two?

Ressler: Lack of available land and a static employment picture for both these markets will continue to show reduced supply (less than 2% of existing stock) in the next 24 months.

GlobeSt.com: What else should our readers take away from your report?

Ressler: Urban centers presenting rich technical diversity and walkability will draw new office space projects. The advent of changing technology and societal work/live behavior regarding transportation and transit-oriented development will be seen first in the gateway markets that Orange County and San Diego represent.