OFFICE MARKET ASSESSMENT

After a strong close to 2021, San Diego’s office market registered 94k SF of direct net absorption in Q1, marking the fourth consecutive quarter of positive absorption totaling 820k SF over the trailing 12-month period.

Despite the quarterly absorption gain, the market-wide direct vacancy rate slightly rose 20 bps to 15.1% in Q1 largely due to new supply additions but has managed to improve 40 bps since hitting a 9-year high at mid-year 2021.

Class B properties posted 96k SF of direct net absorption in Q1 on the heels of its strongest quarterly gain since the pandemic’s onset to close out 2021, bringing the trailing 12-month total up to 210k SF. Class B direct vacancy declined by 30 bps to 13.4% in Q1 and has improved 130 bps since its cyclical peak in Q3 2021.

The Class A property sector posted modest occupancy losses in Q1 but has experienced robust absorption gains totaling 609k SF over the trailing 12-month period. Class A direct vacancy jumped 60 bps to 16.8% in Q1, reaching an 11-year high largely due to recent construction deliveries.

Touring and leasing activity picked up as occupiers re-evaluate their future space needs and more confidently execute leasing decisions. The life sciences and technology sector has been the driving force behind the upswing in leasing demand.

Leasing activity has sharply accelerated to pre-pandemic levels with 7.0 MSF leased over the trailing 12-months, up 102% year-over-year, with most of the increase taking place in Class A product. Leasing activity totaled 2.1 MSF in Q1 with roughly 60% of this volume attributed to pre-leasing activity.

Life science projects currently planned and under construction experienced a surge in pre-leasing activity in Q1. Neurocrine Biosciences signed a 637k SF pre-lease commitment at the Aperture Del Mar project currently under construction which will encompass 5 buildings upon completion. In addition, Bristol Myers Squibb secured a 427k sf pre-lease at Campus Pointe 4, while Singular Genomics inked a 209k sf prelease at One Alexandria Square.

Sublease availability rose by 285k SF in Q1 but has fallen by 12.3% since hitting an all-time high of 2.2 MSF one year ago. The reduction has been attributed to many sublease listings either converting to direct space or tenants taking advantage of discounted sublease spaces.

Rising construction costs and sustained demand for quality space have pushed asking rents to an all-time high. Class A asking rents moved up 4.9% while Class B rents rose 2.6% Y-O-Y. New spec construction and life sciences conversions of older buildings are expected to push rents even higher in the year ahead.

New construction remains robust with 4.1 MSF underway, which is 30% pre-leased; approximately 61% of which is concentrated in the Downtown submarket. Developers are expected to deliver 1.5 MSF of new product in 2022.

As pent-up demand from the pandemic continues to flow back into the market, office demand is poised to grow and positively impact the market in 2022. Despite the anticipated recovery, vacancy levels are expected to gradually improve at a measured pace due to a wave of new construction deliveries slated to come online.

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