OFFICE MARKET ASSESSMENT
San Diego’s office market registered positive absorption for the fifth consecutive quarter with 1.1 MSF of direct net absorption in Q2, its largest quarterly gain since the pandemic’s onset, bringing the trailing 12 months total up to 1.8 MSF of occupancy gains.
This solid demand has caused the market-wide direct vacancy rate to drop 140 bps to 13.7% in Q2 and has compressed 180 bps since hitting a 9-year high at mid-year 2021.
The Class A property sector posted robust absorption gains totaling 640k SF in Q2 and 1.1 MSF over the trailing 12-month period. Class A direct vacancy dropped by 150 bps to 15.3% in Q2 after hitting an 11-year high during the prior quarter.
Class B properties posted 462k SF of direct net absorption in Q2, bringing the trailing 12-month total up to 768k SF. Class B direct vacancy dropped by 130 bps to 12.1% in Q2 and has improved 270 bps since its cyclical peak in Q3 2021
Touring and leasing activity has picked up as occupiers are re-evaluating their future space needs and more confidently executing 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 6.8 MSF leased over the trailing 12-months, up 77.5% Y-O-Y, with Class A product experiencing most of the increase due to a surge in pre-leasing activity in recent quarters within life science projects currently planned and under construction.
The largest lease transaction in Q2 involved Leidos signing a 170k SF pre-lease commitment at 4150 Campus Point Ct that will deliver by mid-year 2024. In addition, Apple continued to grow its presence with a 95k SF lease at 16765 W Bernardo Dr and a 53k SF lease at 16409 W Bernardo Dr.
Sublease availability rose by 123k SF in Q2 but has declined by 7.0% since hitting an all-time high of 2.1 MSF early in 2021. The reduction has resulted from 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 higher. Class A asking rents have increased 2.1% while Class B rents rose 1.2% Y-O-Y. New spec construction and life sciences conversions of older buildings will likely push rents even higher in the year ahead.
New construction remains robust with 4.1 MSF underway, which is 23% pre-leased. Approximately 68% of this new product underway is concentrated in the Downtown submarket. Developers are expected to deliver 1.4 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.
