SAN DIEGO—As the creative-office trend hits large blocks of space here, it would be nice to start seeing it trickle down to multitenant buildings in San Diego, Colliers International‘s associate VP Derek Applbaum tells GlobeSt.com. After the firm released its third-quarter office report for San Diego, we spoke exclusively with Applbaum about the data and what stands out the most for him as we move further into the final quarter of the year.
GlobeSt.com: What stands out for you the most about your firm’s recent San Diego office report?
Applbaum: What stands out the most for me starts with 1.1 million of net absorption so far this year. From a countywide standpoint, asking rates have continued to go on the rise, and if you get granular, many markets are getting close to pre-recession peak rates. In Mission Valley, the highest-priced building was leasing in the $3.25- to $3.35-per-square-foot range in 2006 and is now at the $3.15 or $3-plus-electric range right now. There are single-digit vacancies in some markets.
GlobeSt.com: Where are there untapped opportunities for this sector in San Diego?
Applbaum: The class-B sector is really where the rates could rise in San Diego office, and even some class-C buildings. As we are getting close to pre-recession peaks, some B commoditized space will see rent growth, and also in multi-tenant space. Landlords are getting aggressive with bigger blocks, and as Qualcomm moves out of 250,000 square feet of space in Sorrento Valley—they occupy almost half of that market—we might see those rates get a little more competitive to get those blocks off the market.
GlobeSt.com: What are the challenges to leasing office space here, if any?
Applbaum: Multitenant has been very active, asking rates continue to rise ad concessions are starting to pull back a little bit. Going forward into next year, deals are being completed in all sizes, and this space will be absorbed by the first quarter of next year as companies physically move into their new spaces. From a price-point perspective, in UTC, Del Mar, Carmel Valley and Torrey Pines, asking rates are getting to the highest point. We might see some of the smaller tenants move a little in a flight to quality, such as up to Sorrento Valley for B product or down to Governor Park. In UTC, we’re seeing in the low $4 range in new product. In San Diego, these are new numbers we haven’t seen before.
GlobeSt.com: What else should our readers know about the San Diego office market?
Applbaum: You have several companies going to “ready-now” space, Bixby Retreat or creative, and this space needs to start to translate to smaller tenants, too. You see bigger blocks for that creative world, and for San Diego a 10,000-square-foot or 20,000-square-foot deal is still considered a large deal. The average-size office deal in San Diego is 5,000 square feet. There’s a project in Governor Park that was transformed into creative office and hit about $2.65 triple net for a wireless tenant. That market hasn’t seen those types of numbers. It’s nice to see that creative supply in the market as it’s starting to hit Downtown and other markets like Sorrento Valley with Enclave and Carlsbad with MAKE. Mission Valley hasn’t really taken that creative approach, but it may start. However, these projects are more for the big blocks. It would be nice to start to see this trickle down to the multitenant market or appeal to the smaller tenants out there. Fifth and Laurel is going through a repositioning right now—the Mr. A’s building—and could be a leader in that area of San Diego. It could pull tenants from Downtown or up in the central markets and even smaller tenants that live right around that area. There are a lot of affluent people in those areas of Mission Hills and La Jolla who would be attracted to smaller creative space.