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Office Leasing Strong, But New Supply Could Outpace Demand

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While tenant demand continues to fill office space in San Diego County, a new report from Colliers International notes that millions of square feet are being planned both downtown and in the suburban markets.

Ron Miller, a Colliers senior vice president who compiled the report, said while there will be exceptions, most office developers won't be building purely speculative projects.

"For the most part, it will be a function of pre-leasing," he said, adding that projects such as Lincoln Property Co. and Gemdale USA Corp.'s 630,000-square-foot Aperture Del Mar, for example, isn't likely to be a speculative development.

By contrast, Kilroy Realty Corp. not only has been able to bring its 286,000 square feet of Class A office space in One Paseo to about 75 percent pre-leased, it has virtually filled the 96,000-square-foot retail portion of the property. Even the apartments at One Paseo, despite sky high rents, are leasing up extremely well.

"Kilroy is on fire," Miller said.

Kilroy Realty is currently planning the 600,000-square-foot Santa Fe Summit property just southwest of Rancho Penasquitos, a 180,000-square-foot property in Little Italy, and the 160,000-square-foot 9455 Towne Centre Drive building in UTC.

"Kilroy has a tremendous amount of product under way," Miller said.

Many other office projects are in the works by other developers.

Makers Quarter, where construction is ongoing, eventually will be home to 1 million square feet of office space, while more than 1. 2 million square feet of office space is being planned for the Manchester Pacific Gateway project on the former Navy Broadway Complex site. It includes a roughly 365,000-square-foot build-to-suit headquarters for the U.S. Navy.

Plans for Courthouse Commons, to be constructed on the site of the old state courthouse, call for 270,000 square feet of office space, 431 apartments, and 18,600 square feet of commercial/retail. The project is slated for completion in June 2023.

Additional office space is planned by Stockdale Capital Partners for Horton Plaza, although a pair of the mall's current tenants are fighting the conversion. Natural foods grocer Jimbo's filed a Superior Court lawsuit in May of last year and Macy's filed a Superior Court lawsuit earlier this month.

Both claim Stockdale Capital Partners is violating the terms of their lease by changing Horton Plaza's proposed future use.

Miller said it could be very costly for Stockdale to make the Macy's lawsuit go away.

"Macy's is ruling the roost," he said. "They're going to be extracting some serious coin. Macy's is paying a ridiculously low rent, and it's going to take a lot of dollars to buy them out."

Miller said if Stockdale can resolve the tenant contract issues, the project should fare well, though he did express concerns about the homeless still occupying Horton Plaza Park.

Some large projects in San Diego's suburban office submarkets include the 420,000-square-foot Preserve @ Torrey Highlands by Cisterra Development, the 240,000-square-foot Merge 56 by Sea Breeze Properties adjacent to Rancho Penasquitos, the 220,000-square-foot La Jolla Commons III by American Assets Trust in UTC, and the 180,000-square-foot Pacifica office development by City Office REIT in Sorrento Mesa.

In eastern Chula Vista, Chesnut Properties is reportedly close to breaking ground on the initial 165,000-square-foot office building known as "Think" in the eventual 1.5 million-square-foot Millenia Office campus. Chesnut has been awaiting pre-leasing before beginning.

As for the existing market, Colliers found that a total of 263,000 square feet of net absorption in the third quarter brought the total of net absorption for the first nine months to 968,000 square feet.

Several downtown office projects are undergoing major renovations that will elevate them to Class A status. They will be available for occupancy in the 2019-2020 timespan.

The overall office vacancy in San Diego County increased slightly to 10.4 percent in the third quarter. The office vacancy rate in the suburban markets dropped to 9.7 percent with Class A core submarkets such as Kearny Mesa (3.4 percent) and UTC (7.3 percent) posting the lowest Class A vacancy rates.

The average Class A office asking monthly rental rates spiked up nine cents to $3.41 after reaching their all-time peak of $3.33 per square foot, per month in the first quarter of 2019. The average asking rate for all asset classes increased slightly to end the quarter at $2.77 per square foot, per month -- the highest rate on record.

There were 33 San Diego venture capital-funded investment deals in the third quarter totaling $860 million, marking a 3 percent quarter-over-quarter decrease, according to Dow Jones VentureSource.

Health care raised the most VC funding, bringing in a total of $272 million during the third quarter.

"We are entering a more mature phase of the overall BioTech sector as compared to five years ago," Colliers stated. "UCSD obtained a record $1.38 billion in research contracts, shattering a funding record and maintaining their standing as one of the 10 largest research schools in the country. San Diego's EDC identified a projected need for more than 7,200 additional software-related positions over the next three years."

thor_biberman@sdtranscript.com

By Thor Kamban Biberman



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Ron Miller

Brokerage Senior Vice-President

San Diego

Ron Miller is a Senior Vice President of Colliers International's Occupier Services San Diego Team in San Diego. As a native San Diegan and Corporate Real Estate Advisor, Ron represents local, regional, and national corporate office tenants. Ron’s experience and extensive market knowledge allow him to deliver the highest level of service to his clients in all facets of their corporate real estate endeavors, which include managing requirements for new locations, renewals and dispositions, as well as containment of overall real estate costs. With his extensive career experience in landlord and tenant representation, Ron offers a unique perspective and valuable insight in exclusively representing corporate office tenants.

The Occupier Services San Diego Team's primary focus is San Diego's Class A submarkets: UTC, Carmel Valley, Sorrento Mesa, Del Mar, Torrey Pines, Solana Beach, Carlsbad, Kearny Mesa, Mission Valley, and Downtown’s CBD.

Prior to joining Colliers International, Ron served as a Senior Vice President, Principal, and a top producing broker at Burnham Real Estate for representing both Tenants and Landlords.  

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