Behind the Numbers

  • Q3 2018 net absorption totaled 188,541 SF, bringing overall year to date net absorption to 519,198 SF. 
  • For a second consecutive quarter, Class A average asking rental rates remained at an all-time peak of $3.29/SF/month, a 1.9% year-over-year increase. The overall average increased by $0.02 to end the quarter at $2.71/SF/month which is only $0.01 less than the peak rate of $2.72/SF/month rate nearly 11 years ago (Q4 2007). 
  • Countywide overall vacancy dropped to the lowest level in twelve years to 10.7%.

Net Absorption

As stated above, San Diego County net absorption for Q3 2018 equaled 188,541 SF. Class B inventory recorded the most activity with 141,014 SF of net absorption, Class A at 102,806 SF, and Class C with negative net absorption of 55,279 SF.

The University Towne Centre (UTC) submarket posted the most positive net absorption (+111,357 SF) in Q3. In particular, 4365 Executive Drive (The Plaza) had 47,050 SF of net absorption
attributed primarily to Axos Bank (formerly Bank of the Internet). 4370 La Jolla Village Drive (The Plaza) had 25,712 SF absorbed by Fairway Technologies and AXA Equitable. Additionally, eight new tenants absorbed a net 31,350 SF at 4660 La Jolla Village Drive (La Jolla Center I)

Other key submarkets posting significant absorption included Carlsbad (+61,630 SF), Uptown (+31,989 SF) and Old Town/Sports Arena/Pt. Loma (+31,240 SF). Activity in these markets was driven by smaller multi-tenant leasing.

 

Vacancy

The Countywide vacancy of 10.7% in Q3 2018 is a 20 basis point decrease from the prior quarter. The vacancy rate includes direct vacant space (10.2%) and minimal sublease space (0.4%).

Overall vacancy of 11.7% in Downtown stood virtually unchanged from the prior quarter - up 2 basis points – due to 1,761 SF of negative net absorption. Overall vacancy in the Suburban market stood at 10.6% with larger core submarkets such as Kearny Mesa (7.0%) and UTC (9.3%) posting the lowest rates and Carlsbad (16.9%) with the highest rate. For a second consecutive quarter, Carlsbad – and all other submarkets – posted vacancy rates below 20%.

Countywide Class A and Class B vacancy rates ended the quarter at 13.4% and 9.8%, respectively. Class C posted the lowest vacancy rate at 6.38%.

 

New Supply

New construction completions for the quarter included a single 17,654 SF office building on Grossmont Summit Drive in La Mesa. There are currently eight projects totaling 1.1 million SF under construction countywide, of which 640,646 SF is expected to be completed by year-end. 2018 will have the second highest level of new construction completed in the last nine years.

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 (33,806 SF preleased to International Workplace Group), a 150,000 SF office building being built by Alexandria Real Estate Equities at 9625 Towne Centre Drive (preleased to Takeda), 5,000 SF of creative office space in a mixed-use project in Mission Valley named The Millennium, Lift which is a 54,646 SF two-building project on Innovation Way in Carlsbad being developed by RAF Pacifica Group, The Watermark – a 158,994 SF building on Scripps Gateway Court in Scripps Ranch (preleased to MedImpact), The Heights at One Paseo - a two-building 300,266 SF project being developed by Kilroy Realty in Carmel Valley, and a 24,000 SF building on S. Coast Highway 101 in Encinitas.

In addition to new ground-up construction, several projects in Downtown are undergoing major renovations that will elevate them to the Class A category and will be available for occupancy between 12 and 18 months. These includes the Tower 180 – a 345,016 SF office building that was occupied primarily by the City of San Diego but vacated during renovation
due to asbestos abatement, the 161,028 SF former Paladion building located across from Horton Plaza owned by Bosa Development, and DivcoWest’s recently purchased 123,079 SF building at 1420 Kettner Blvd.

 

Trends, Forecast & Outlook

Vacancy will continue to decrease during Q4 2018, settling in at between 10.3% 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. By year-end, the countywide overall average asking rental rate will likely reach a historical peak and continue increasing by 2% to 3% during 2019.