Behind the Numbers

>Q2 2018 demand outpaced Q1 bringing year-to-date net absorption to 367,432 SF.

> Class A average asking rental rates reached all-time peak of $3.26/SF/month at the end of Q2 2018 – a 1.6% year-overyear. The past three quarters have seen the Class A average
continue to increase above the peak rate of $3.23/SF that was reached in Q1 2018. The overall average across all classes increased by $0.03 to end the quarter at $2.69/SF/month. This average is only $0.03 less than the peak rate of $2.72/SF/month reached more than 11 years ago (Q4 2007).

>Countywide overall vacancy continues to drop and currently stands at 10.8%. This is the lowest vacancy rate in nearly a decade (9.9% in Q3 2006).

Net Absorption

San Diego County posted 259,666 SF of positive net absorption in Q2 2018. The Class B inventory boasted sizable activity with 183,681 SF of net absorption during the quarter, with Class A and Class C registering 52,251 SF and 23,734 SF, respectively.

Carlsbad posted the most positive net absorption (+224,618 SF) in Q2. The biggest block of absorption occurred when Nortek Security & Control occupied 88,858 SF at 5919 Sea Otter Pl – a building that was extensively renovated in 2016. Another notable tenant relocation included 25,905 SF occupied by Real Capital Markets at 2051 Palomar Airport Rd.

Other key submarkets posting significant absorption included UTC (+52,947 SF) and Carmel Valley (+44,734 SF). In UTC, the most significant tenant activity occurred when AbacusNext vacated 27,658 SF at La Jolla Gateway II and completed an expansion of 63,129 SF at Eastgate Summit. Eastgate Summit is a brand new building developed in 2016 and the move was noted as a relocation between two Irvine Company properties in the same submarket. GreatCall completed an intermarket move in Carmel Valley, moving out of 28,541 SF in Building C of Pacific Plaza @ Torrey Hills into 56,153 SF in Building B of the same project.

Vacancy

Countywide vacancy of 10.8% in Q2 2018 amounted to a 25 basis point decrease from the prior quarter. The vacancy rate was comprised primarily of direct vacant space (10.3%) with minimal sublease space (0.5%). 

Overall vacancy in Downtown stood at 13.2% - up 67 basis points from Q1 2018, due to 69,714 SF of negative net absorption. Overall vacancy in the Suburban market stood at 10.4% with larger core submarkets such as Kearny Mesa (6.7%) and Mission Valley (7.6%) posting the lowest rates and Carlsbad (18.0%) with the highest rate. For the first time in a year, Carlsbad
– and all other submarkets – posted vacancy rates below 20%. 

Countywide Class A and Class B vacancy rates ended the quarter at 12.9% and 10.7%, respectively. Class C posted the lowest vacancy rate at 6.3%.

New Supply

New construction of 48,954 SF was completed in Q2 2018. This included a single spec building developed by Burke Real Estate Group at 1800 Aston Avenue in Carlsbad; it is available for lease. There is currently 793,294 SF under construction countywide, of which 634,300 SF is expected to be completed by year-end. This level of activity will exceed 635,461 SF completed last year.

As of quarter-end, there were eleven buildings under construction. These projects include a four-building 357,000 SF build-to-suit on Town Garden Road in Carlsbad for ViaSat, 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, 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 54,646 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 10.0% and 10.5% by year-end. Continued demand along with relatively 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% to 3% by year-end.