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A Bump in the Road or a Left Turn-Surprising Availability Increase in Q2

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By David Marino

For the first time in a number of years, the total combined office, lab and industrial inventory in San Diego county increased by 1.17 million SF, of which 442,000 SF of that was an increase in total sublease availability. It has been quite some time when both total availability and sublease availability increased. Given how robust the capital markets are and the perception of a continued strong economy (with record low unemployment), these quarterly numbers are a little unsettling. While there have been surprises like Qualcomm putting 300,000 SF of space on the market for sublease in Sorrento Mesa, there is no single reason to attribute this slowdown in momentum to.

While we have not seen a slowdown of demand in our own client base, across industries and across sizes of companies, it does cause reason to watch closely for the balance of 2018 as demand for office, lab and industrial space may have hit equilibrium. Of most concern for the office markets are Del Mar Heights, where the average office space has been on the market for 16 months, the highest in the county, in contrast to Downtown and the 1-15 Corridor at 8 months and 9 months, respectively. Availability rates continue to be lagging in both Carlsbad and Sorrento Mesa, with availability rates now at 22% and 23%, respectively. Sorrento has been hardest hit by the downsizing of Qualcomm and a good amount of merger and acquisition activity that has also shed some space recently.

Also surprising is that Sorrento Mesa has the highest availability rate of industrial and lab space in the county at 14.6%. However, there are a number of active transactions underway with biotech companies that could take as much as 400,000 SF of space off the market before the end of the year, which would start to stabilize the industrial side of Sorrento Mesa. However, for the Sorrento office market, there is no recovery in sight as tenants would elect to be in the less congested, adjacent submarkets with more amenities–like UTC–and not have to pay substantially more, or migrate over to the 15 freeway which is closer to most employer’s labor markets out of the gridlock that still defines Sorrento Mesa.

In all, the demand for space seems to have slowed and the summer season should prove to be sluggish through the third quarter. Hopefully this is just a speed bump on a continued path to economic growth into 2019, versus this turning out to be a rock in the road before we head off a cliff.

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David Marino is executive vice president of Hughes Marino, an award-winning commercial real estate company with offices across the nation. One of the top commercial brokers in all of Southern California, David possesses unrivaled, comprehensive market knowledge, and writes regularly about San Diego commercial real estate on his blog, Suburban Scoop. Contact David at 1-844-662-6635 or david@hughesmarino.com to learn more.

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