Plenty of Exciting Things Happening in Region
SAN DIEGO, Calif., April 18, 2019 – San Diego’s office market is off to a positive start to 2019 with market fundamentals still very healthy, according to Cushman & Wakefield’s new first quarter of 2019 report. Market highlights included a few hundred thousand square feet of occupancy growth to kick off the year, further rent growth in Class A and B segments, and continued investor demand. Following a modest amount of occupancy loss last quarter to close 2018, the firm had predicted the office sector would quickly step back into growth mode.
Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, said “Tenants absorbed 200,000 of office space on a net basis in the first quarter of 2019. With the exception of last quarter (Q4-2018), every quarter for approximately the last four and a half years (19 quarters) has seen occupancy growth, during which tenants have absorbed 6.6 msf combined.” She noted, “Given the activity we have long been tracking, we fully expected the first quarter would see a solid level of positive net absorption, and that Q4-2018 would in fact prove more as a brief blip.”
The firm’s new report indicates that while occupancy improved, overall office vacancy, however, continued to inch upward now at an even 14%. The year began with a modest increase of 20 bps from last quarter, and is now up 110 bps from a year ago from 12.9%. This was the third consecutive quarter vacancy increased as some notable vacates occurred within the market during the first quarter, in addition to the 1.1 msf that has delivered over the last year that has caused vacancy to trend upward.
Campion said, “Another key reason we saw strong occupancy growth yet also increased vacancy has been due to the misalignment of tenant activity. For example, a large block of space was returned by Thomas Jefferson School of Law who vacated 179,000 sf in Downtown, but will soon be taking occupancy of approximately 56,000 sf in their new location at 701B Street next quarter (Q2). And in Torrey Pines, Takeda officially released 94,000 sf this quarter, having occupied their 164,000 sf project in Eastgate last quarter.”
The robust growth during the first quarter was led by Central County, where tenants absorbed more than 320,000 sf combined, followed by North County’s 90,300 sf of growth. Sorrento Mesa saw significant gains as Dexcom began to occupy their 87,000 sf lease at the Towers, and Brain Corporation moved into 59,000 sf at Seaview Corporate Center. Another large occupancy occurred in Rancho Bernardo where Daylight Solutions moved into 68,000 sf. All three transactions were new expansion locations within each respective submarket.
The report states that Sorrento Mesa in particular stands to benefit from significant absorption in 2019, particularly from life sciences and pharmaceutical companies, including TriLink BioTechnologies (100,000 sf); Sorrento Therapeutics (61,000 sf) and Curology (54,000 sf).
Brett Ward, Executive Director with Cushman & Wakefield’s Office Division in San Diego, said “We maintain our positive outlook for San Diego’s office sector looking toward the horizon. The market is expected to see multiple significant vacancies absorbed from leases signed in previous quarters, while we have a solid level of preleased activity on many of our most significant new construction projects. There are plenty of exciting things happening in San Diego, with a diverse representation of companies as well as industries coming as well as expanding here.”
Another major market headline in San Diego has been Apple’s anticipated future occupancy of 97,000 sf in Eastgate. Apple has publicly announced their intent to hire 1200 employees in San Diego and is expected to continue to grow their footprint in Central County.
Ward said, “Such an in-migration and presence from a globally renowned company and powerhouse in tech as well as other industry segments is of course a big deal for our region and our future. We anticipate their arrival to have added ripple effect in our market.”
He added, “Barring any major catastrophe, overall continued economic and job growth in combination with increasing tenant demand should provide continued occupancy and rent growth throughout 2019 and into 2020.”
The report also showed countywide average asking rent across all office classes is now at $3.17 per square foot (psf) on a monthly full service basis. This metric is up 2.9% since year-end 2018 and up 5.0% from a year ago, driven by the addition of large class A availabilities. Over the past 12 months, Class A average rent has increased by 5.8% to $3.62 psf while the Class B rate has increased by 8.2% to $3.03 psf.
With San Diego’s ongoing strong market fundamentals together with an attractive landscape, investor activity and interest also remains stable, with a few sizable, high profile properties trading during the quarter. The largest sale was IDS Real Estate Group’s acquisition of the 181,171-sf Liberty Station in the Point Loma/Sports Arena submarket, followed by the joint venture of Coast Income Properties / Washington Capital Management acquiring the Class A Mesa View Plaza totaling 111,268 sf in Kearny Mesa for $39.1 million. Bridge Investment Group Partners also acquired the 97,316-sf Cornerstone Plaza office complex in Sorrento Mesa for $18.85 million.
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