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2019 Q4 Office San Diego Region

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2019: Strongest year for office demand in five years

Behind the Numbers

  • Nearly 1.5 million SF of net absorption was achieved in 2019 – the best year since 2014.
  • Class A average asking rental rates inched up $0.02/SF during the quarter to reach $3.43/SF/month. Class A rates are up 3.6% over the past year. Overall average rates for all classes increased slightly to $2.81/SF/month – the highest rate on record.
  • Overall countywide vacancy dropped to 9.8%, the first time it has been below 10% in more than 13 years.

Net Absorption

San Diego County net absorption for Q4 2019 equaled 486,950 SF. Class A inventory recorded the most activity with 260,367 SF of net absorption, while Class B recorded 245,167 SF. Class C demand decreased by 18,584 SF of negative net absorption. More than 1.48 million SF of net absorption for all of 2019 made this past year the second most active year in the last decade.

Rancho Bernardo posted the greatest net absorption in Q4 with 119,652 SF. This was primarily driven by the completion and occupancy of a 78,000 SF build-to-suit for Mitchell 1.

UTC (+107,563 SF) had the second highest level of absorption, which included Apple’s occupancy of 96,543 SF at Irvine Company’s Eastgate Terrace project on Towne Centre Dr. Additionally, Apple signed two large leases in Q4 totaling 364,400 SF. The first lease was in Kilroy Realty’s 160,400 SF 9455 TCD project that is currently under construction. The other lease was for a 204,000 SF proposed building called Apex that is to be built by BioMed Realty.

Vacancy

The countywide vacancy of 9.8% in Q4 2019 is a 48-basis point decrease from the prior quarter. Direct and sublease vacancy rates are 9.1% and 0.7%, respectively.

Overall vacancy in Downtown decreased to 14.7% in Q4, driven by net absorption of 49,680 SF. Overall vacancy in the Suburban markets dropped to 9.2%. Within the core submarkets (those with more than 5 million SF of inventory), UTC (5.7%) and Kearny Mesa (6.5%) posted the lowest rates and Carlsbad (15.0%) and Downtown (14.7%) had the highest rate. All the core submarkets saw a drop in vacancy during Q4, except Carmel Valley. For the year, vacancy dropped in all eight of the core submarkets.

Countywide Class A and Class B vacancy rates ended the quarter at 11.0% and 9.5%, respectively. Class C posted the lowest vacancy rate at 8.2%. Most of the absorption in recent quarters has been in Class A, heavily amenitized properties.

The last time countywide vacancy fell below 10% was during a one-year period (Q4 2005-Q3 2006) period prior to the Great Recession. During that year, vacancy ranged from 8.9% to 9.9%. New supply (new construction) outpaced demand (absorption) for the years 2006 through 2009. These years prior to and during the recession were distinguished by upward trending vacancy that capped out at 17.9% in mid-year 2009. Since then, vacancy has steady trended downward after 11 years of consecutive positive net absorption and modest levels of new construction.

New Supply

Only one new building was completed in Q4 – the aforementioned 78,000 SF build-to-suit for Mitchell 1 in Rancho Bernardo. 2019 was the second most active year for new construction during the past decade.

There are currently five projects totaling 950,241 SF under construction countywide. These projects include three being developed by Kilroy Realty: One Paseo - a two-building 288,484 SF project in Carmel Valley (80% pre-leased), the 160,400 SF 9455 TCD building in UTC preleased to Apple, and the 223,357 SF 2100 Kettner building in Downtown. Also, under construction are Sorrento Summit III – a 28,000 SF project pre-leased to Nuvasive and being developed by HCP, Inc. and Cubic’s new 250,000 SF two-building headquarters expansion on Balboa Ave in Kearny Mesa being developed by Cisterra.

New ground-up construction has been subject to high demand. Look no further than Apple’s recent leasing of three separate projects in UTC. All three projects are spec projects with Eastgate Pointe built in 2017, 9455 TCD currently under construction, and Apex to be commencing construction over the next year. Notably, vacancy currently stands at only 2.6% in the 4.5 million SF built in the last decade (2010-2019). New construction over this period was on average 86.7% occupied within a year after each building’s completion date, indicating most space was occupied immediately upon or just after being built.

Trends, Forecast & Outlook

Vacancy will continue to decrease throughout 2020, potentially falling below 9.5% by year-end. The current pace of demand for best quality office space will continue to exceed new supply well into next year. Average asking rental rates will continue to increase at a 2.5% to 3.5% annual rate.


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2019 Q4 Office San Diego Region

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Related Experts

Derek Applbaum

Senior Vice President

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Derek Applbaum has 21 years of specialized leasing and sales of office properties in Central San Diego. Throughout his career, Derek has represented a variety of owners and users through complex lease and sale transactions.  He is considered a trusted advisor amongst his clients as he understands his clients and competitors needs and develops strategies that best suit his clients’ abilities to lease and sell their real estate.

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David Kuchinsky

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David Kuchinsky has excelled in the leasing and sale of commercial real estate since 2000. David’s area of expertise is the Central San Diego office market where he has assisted clients with his extensive experience in needs analysis, strategic planning, site identification and evaluation, lease negotiation, lease renewals, subleasing, and financial analysis. David has also been highly successful in lowering vacancy rates for both local and institutional landlords by designing and implementing innovative and creative marketing strategies.

Prior to joining Colliers International, David was a Vice President at Grubb & Ellis in San Francisco, where he was active in representing both owners and occupiers of office space specializing in the dynamic high tech industry. This industry required David to be accommodating to the quickly changing need of start up’s.

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Chuck Wasker

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Tom Mercer

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Thomas M. Mercer is a thirty-two year commercial real estate veteran, specializing in office, technology and Scientific R&D sales and leases.  He joined Colliers International’s San Diego office in 1982 where he has consistently contributed as a top producer.  He has been San Diego’s top producer nine times and he has consistently received top performance awards company wide.

 

Known for his San Diego office market expertise, Mercer’s experience includes investment sales, land acquisition, marketing strategy, lease negotiations, and market evaluations.  During his partnership with Kevin Craven, he has leased over 8.0 million square feet for a total lease consideration in excess of $3 billion.  The team has also been involved in sale transactions valued at more than $1 billion.  The Colliers duo represented Agouron Pharmaceutical, Inc. a wholly owned subsidiary of Pfizer in signing a 945,000 square foot lease at The Torrey Pines Science Center.  They leased and sold the two phase 325,000 square foot Nokia Product Creation Center for a total consideration in excess of $200 million.  In addition, Mercer represented Kilroy Realty in a 466,000 square foot Build to Suit for Intuit.  He recently completed the sale of the Genesee Executive Plaza, a two-building office/medical office project in the UTC area for $46.6M.

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