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2015 Space Absorption Lags Previous Years as San Diego Recovery Slows

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By David Marino

2015 ended with another quarter of solid net absorption for combined office, lab and industrial space throughout San Diego County, whereby another 670,000 square feet of space came off the market in the region. That totals 2.7 million square feet of space throughout San Diego County for the entire year of 2015.

While these are healthy numbers, they do not reflect the even stronger recovery that the market saw in previous years, when 5.7 million square feet of space came off the market in 2014, and 3.3 million square feet came off in 2013. This slowing recovery might initially be cause for concern, however, based on Hughes Marino’s current client activity throughout the region in all submarkets and product types, we expect that 2016 will be another reasonable recovery year consistent with the numbers we saw in 2013 and 2015.

Sublease activity is another key measure of overall market health, and Hughes Marino is the only firm that measures total sublease inventory on the market throughout the region. Total sublease inventory in San Diego has been consistently low for three quarters in a row, hovering just above 3 million square feet, and is generally concentrated in Sorrento Mesa, UTC and Del Mar Heights. Submarkets including Mission Valley, Kearny Mesa and Downtown have negligible amounts of sublease space available and very few opportunities for tenants to take advantage of below-market rates.

When looking at individual submarket performance levels, Sorrento Mesa and UTC have had the most significant upticks in total availability these last few quarters. In UTC this is mostly a function of the new Irvine Company high-rise, One La Jolla Center, coming online and adding 300,000 square feet of inventory to the market.

At 23%, Sorrento Mesa now has the highest availability rate we’ve seen since the middle of 2010 when office availability rates in that submarket were 25%. This heightened availability has primarily been caused by the downsizing of Qualcomm, which just put another 50,000 square feet of space on the market for sublease at the San Diego Tech Center. As Sorrento Mesa softens, it has the potential to drag down the surrounding submarkets of Del Mar Heights and UTC as tenants look for value. Some tenants might choose to accept lengthened and aggravated commuting patterns in exchange for lower rents and higher concessions.

Another key indicator is the average amount of time that office space sits on the market. During the recession four years ago the average time on the market ranged from 18 to 24 months in virtually every San Diego submarket. Now, as the market has tightened and the options are fewer, space is sitting on the market for much less time than we’ve seen in a number of years, whereby Kearny Mesa has the highest average time on the market at 17 months, and markets like Mission Valley, UTC, Del Mar Heights, Sorrento Mesa and the I-15 corridor are all closer to one year. These numbers are down 50% from what we saw during the depths of the recession six years ago.

Downtown continues its vacancy decline, dropping from 16.4% a year ago to 14.8% today. Most of the vacancy is in Class B buildings. Class A vacancy has dropped from 12.1% to 9.4%, with most of the vacancy centered on four buildings (three due to excessive rental increases and one a result of poor remaining locational space options). Meanwhile, Class A rental rates have jumped 12.5% the last year, with prime view space not only hard to come by but much more expensive than non-view space.

While supply and demand economics is certainly a key driver for the rental rate inflation we’re seeing, it is also being driven by all the recent buying and selling of high-rise buildings in Downtown – with even more underway. New owners, desperate to justify their recent investment, push rental rates high enough to rationalize their purchase price, leading to a self-fulfilling prophesy. 2016 will see slower velocity given the lack of space options, while rental rates continue to rise and ultimately force tenants to look in less expensive submarkets.

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David Marino is senior executive vice president of Hughes Marino, a global corporate real estate advisory firm that specializes in representing tenants and buyers. Contact David at 1-844-662-6635 or david@hughesmarino.com to learn more.



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