Behind the Numbers
> Office demand in 2017 – as measured by net absorption of 507,418 SF – was the lowest level of net activity since 2009 and 53% of the average annual net absorption of the prior five years (1.09 million SF).
> Class A average asking rental rates reached $3.25/SF/month, exceeding the all-time peak rate of $3.23 reached in Q1 2008.
> An overall vacancy rate of 11.6% countywide remains unchanged from a year ago (Q4 2016).
After starting out the first half of the year with negative net absorption, the second half of 2017 picked up as San Diego County posted 570,418 SF of positive net absorption for the year. Of last year’s total, 203,685 SF occurred in Q4. Most of 2017’s demand occurred in Class B space where net absorption totaled 243,297 SF, followed closely by Class A space (+225,408 SF).
Kearny Mesa posted the most positive net absorption (+109,750 SF) in Q4. The biggest block of absorption occurred when Council of Community Clinics purchased the 20,060 SF building at 3710 Ruffin Road to occupy as owner/user. Various mid-sized tenants such as Coast Payroll Services (+9,363 SF) and Quake Global (+9,053 SF) added to Kearny Mesa’s overall demand.
Carmel Valley (+76,199 SF) and Scripps Ranch (+53,903 SF) had the second- and third-most net absorption. In Carmel Valley, Retrophin occupied 22,957 SF at 12770 El Camino Real and Edico moved into 17,361 SF at 12400 High Bluff Drive. The purchase by Mission Federal Credit Union of an owner/user building at 10343 Meanley Drive (+58,246 SF) in Scripps Ranch ranked as the single largest absorption activity in Q4.
Net absorption was generally positive in most submarkets countywide, but the I-5 Corridor, Uptown, Rancho Bernardo, Downtown, UTC and Torrey Pines all had negative absorption ranging from 21,000 to 26,000 SF.
Countywide vacancy of 11.6% in Q4 amounted to a 21 basis point decrease from the prior quarter and a 4 basis point decrease from a year ago. The vacancy rate was comprised primarily of direct vacant space (10.9%) with minimal sublease space (0.7%).
Overall vacancy in Downtown stood at 15.9% - up 25 basis points from Q3 and due to 24,849 SF of negative net absorption. Overall vacancy in the Suburban market stood at 11.0% with core submarkets such as Kearny Mesa (7.6%) and Mission Valley (7.9%) with the lowest rates and Carlsbad (20.1%) with the highest rate. Countywide Class A and Class B vacancy rates ended the year at 12.8% and 12.0%, respectively. At 7.7%, Class C vacancy was considerably lower.
During the year, a total of 635,461 SF of new construction was completed in a total of ten buildings. Half of the new construction (316,262 SF) was concentrated at Illumina’s three-building i3 Campus in UTC that was occupied in Q3. In Q4, a total of 32,336 SF was completed, which consisted of CBRE’s new office space a part of Westfield UTC’s expansion.
As of quarter-end, there were seven buildings totaling 320,444 SF under construction, all of which will be completed in 2018. These projects include a 48,954 SF creative-office building on Aston Avenue in Carlsbad, the 50,000 SF creative-office building at Makers Quarter in Downtown, a 150,000 SF office building being built by Alexandria Real Estate Equities and preleased to Takeda at 9625 Towne Centre Drive in UTC, a 5,000 SF of creative office space in Mission Valley on Camino De La Reina called The Millennium, a 13,200 SF building on Grossmont Summit Drive in La Mesa, and the 53,290 SF two-building Lift project on Innovation Way in Carlsbad being developed by RAF Pacifica Group.
Trends, Forecast & Outlook
San Diego County started off with negative demand for the first half of 2017, but reversed course in the second half of the year. Absorption will continue to trend positively in 2018, albeit at a slower rate than the years after the last recession (2010-2016).
Vacancy will continue to decrease in 2018, likely ending the year between 10.8% and 11.5%. The combination of steady demand coupled with historically low levels of new construction will continue to point to a downward vacancy trend for the foreseeable future.