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Hughes Marino San Diego Office Update Q2 2014

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The second quarter of 2014 saw an unprecedented drop in available space. In this last quarter, just over 1.8 million square feet of office, lab, manufacturing and warehouse space came off the market in San Diego County. This level of absorption is greater than anything we’ve seen in the last eight years. For comparison, in the first year of the correction back in 2010, 1.1 million square feet of available space came off the market. Then 1.7 million in 2011, 2.4 million each year in both 2012 and 2013, and just over 2.8 million in the first half of 2014. This shows that the recovery is in full swing.

There are no specific transactions or industries responsible for this dramatic improvement in the market. Across industries and across sizes of tenants, companies continue to gobble up more space for their expansions. This is true with office space and in the biotech industry, which is healthier than it’s been in over a decade. Also, as the supply chain around industrial real estate begins to fill up again, we are beginning to feel significant supply shortages with many of our active warehousing and manufacturing requirements.

Historically, almost any active client for the leasing of space, of any size, would have at least 10-15 viable options to choose from, and we would typically be touring 6-8 of those which are the best fits. Now we are finding that many client requirements only have as many as 5-6 strong viable alternatives to choose from, and they are only in love with 2-3. The only exception to this is for companies under 5,000 square feet looking for smaller spaces, of which there still tends to be plentiful supply. The supply of Class B office space is also plentiful, particularly in Sorrento Mesa, Downtown and Carlsbad.

Downtown’s Class A market has changed dramatically. There are very few good options for west side space, and there are more Class A buildings over 95% leased (or soon to be) than under. The result is large rental increases and the lessening of concessions. Class B space is still a blood bath with landlords offering lots of leasing incentives, including free parking. Rates for Class B options continue to be less than $2/sf for those landlords interested in doing any leasing.

In looking at submarket availability rates, it would appear that Del Mar Heights is the softest. But, in fact, the high availability rate is reflective of Kilroy Realty having AMN Healthcare’s space on the market, anticipating that they would move from their 175,000 square foot corporate headquarters building on High Bluff Drive. However, AMN has come to terms to renew on a long-term lease, and that inventory will actually come back off the market as of next quarter. Considering that, along with other active client expansions in the market, we will continue to see declines in available space throughout the coming year.

These supply shortages are starting to trigger the early signs of speculative development, as evidenced by The Irvine Company’s new 300,000 square foot high rise being built in UTC. There are additional speculative office projects planned for both Del Mar Heights and Sorrento Mesa, which should be coming online in 2016 as the market continues to improve.

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David Marino is executive vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact David at 1-844-662-6635 or david@hughesmarino.com to learn more.



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