Behind the Numbers

> Demand during Q1 2018 was off to a strong start with 157,912 SF of positive net absorption.  2018 is poised to see increased demand, outpacing last year’s positive net absorption of 540,748 SF
> After Class A average asking rental rates reached an all-time peak of $3.25/SF/month at year-end 2017, they dropped by $0.01 to $3.24/SF/month in Q1 2018.  The overall average across all classes increased by $0.02 to end the quarter at $2.66/SF/month after remaining flat for the prior two quarters.
> Countywide overall vacancy continues to drop and currently stands at 11.4%.  This is the lowest vacancy rate in nearly a decade (9.9% in Q3 2006).

Net Absorption

San Diego County posted 157,912 SF of positive net absorption in Q1 2018. While the Class A inventory saw a dip in demand (-62,547 SF), both Class B (+125,775 SF) and Class C (+93,684 SF) had some notably good activity.

Scripps Ranch posted the most positive net absorption (+118,116 SF) in Q1.  The biggest block of absorption occurred when Mission Federal Credit Union occupied a 53,744 SF building in Horizon Tech Center, which they purchased last quarter. Downtown posted the second highest net absorption (+60,187 SF) during the quarter.  This included a 22,486 SF lease by American Addiction Centers at 1200 4th Ave and 15,718 SF occupied by Manning & Kass, Ellrod, Ramirez, Trester LLP at 225 Broadway.

Other key submarkets posting significant absorption include Kearny Mesa (+34,833 SF) and UTC (+30,438 SF).  While most of the activity in Kearny Mesa were smaller tenants, UTC had some notably larger tenant activity.  WeWork continued its countywide expansion by occupying 43,032 SF at The Aventine.  Also, KPMG relocated to 22,853 SF at One La Jolla Center, expanding from La Jolla Commons Tower I.

Another notable tenant expansion included Avanti Workspace Executive Suites occupying 25,065 at Palomar Heights Corporate Center in Carlsbad.  TrellisWare Technologies signed the largest lease during the quarter and will be occupying 72,331 SF in the recently renovated Summit Pointe in Scripps Ranch in Q4 2018.

Vacancy

Countywide vacancy of 11.4% in Q1 2018 amounted to a 17 basis point decrease from the prior quarter.  The vacancy rate was comprised primarily of direct vacant space (10.8%) with minimal sublease space (0.6%). 

Overall vacancy in Downtown stood at 15.6% - down 34 basis points from Q4 2017, due to 60,187 SF of net absorption.  Overall vacancy in the Suburban market stood at 10.8% with larger core submarkets such as Kearny Mesa (7.2%) and Mission Valley (7.9%) posting the  lowest rates and Carlsbad (21.0%) with the highest rate.

Countywide Class A and Class B vacancy rates ended the year at 12.9% and 11.8%, respectively. Class C posted the lowest vacancy rate (6.9%) overall.

New Supply

No new construction was completed in Q1 2018.  There was 763,892 SF under construction of which 604,898 SF is expected to be completed by year-end.  This level activity is on par with the 635,461 SF completed last year.  54% of the new space to be completed in 2018 will be speculative development, indicating some developers are willing to respond to the steady tenant demand that has resulted in a 36% drop in vacancy over the past nine years.

As of quarter-end, there were nine buildings under construction.  These projects include a 280,000 SF build-to-suit on Town Garden Rd in Carlsbad for ViaSat, 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 17,654 SF building on Grossmont Summit Drive in La Mesa, the 53,290 SF two-building Lift project on Innovation Way in Carlsbad being developed by RAF Pacifica Group, and The Watermark – a 158,994 SF building on Scripps Gateway Court in Scripps Ranch that is preleased to MedImpact.

Trends, Forecast & Outlook

Vacancy will continue to decrease throughout 2018, settling in at between 10.8% and 11.1% by year-end.  The combination of steady demand coupled with historically low levels of new construction will continue the downward vacancy trend for the foreseeable future.  The countywide overall average asking rental rate will likely continue to increase by 2.5% to 4.0% at year-end.