San Diego’s skyscrapers offer great views, first-class amenities and are served by the best public transportation in the county. But, the buildings have languished during the last six years when it has come to occupancy rates — hitting 17.9 percent vacancy in 2010.
But now there is some good news. The market reversed six years of flat or negative growth by attracting 106,000 square feet of new or expanding tenants in 2012. Vacancy rates dropped to 16.5 percent in the fourth quarter of 2012. But there are also warning signs.
“Positive indicators such as lowered vacancy rates, an influx of new tenants, and renewed investor activity are all pointing to a measured recovery in the top tier of properties in San Diego’s central business district,” according to a report by Jones Lang Lasalle. “This optimistic outlook is somewhat tempered by a few large upcoming lease expirations however.”
Our City wrote about the market in our January/February issue, pointing out that the prevalence of homeless people in the area and an economy that has shifted north have been major obstacles to long-term growth for downtown.
The Irvine Company, the largest landlord in the market and in San Diego, reached 89.6 percent occupancy this past quarter among its six-building portfolio in downtown. It did that by capturing nearly 50 percent of all deals signed in 2012, many due to aggressive pricing.
But conversely that meant rents in the downtown skyline market were flat in 2012. The average asking rent for all Skyline properties is $27.46 per square foot, fully serviced.
Still, there are no new high-rises in the construction pipeline, so brokers and landlords are hopeful demand will continue to increase, albeit slowly, and rents will eventually inch up.
But there could be a hiccup to this slow growth plan in 2013.
“The forecasted improvement to the market notwithstanding, there is still plenty of uncertainty Downtown due to some large blocks of upcoming availabilities,” the Jones Lang Lasalle report states. “The City of San Diego is still mulling a decision on the upcoming roll of their 500,000+ square foot lease commitments and Sempra’s entire building is also rolling soon. If one or both of these tenants’ downsize significantly, gains made in 2012 could be erased and the market may return to the doldrums seen during the recession.”
Retail space downtown also saw improvement in 2012. The year-end vacancy rate dropped from 10.7 percent in 2011 to 8.6 percent, its lowest point since 2008.
The retail sector absorbed 109,460 square feet, according to a report by Cushman & Wakefield. But like the skyline market, the average rental rates dropped.
“The average rental rate drop can be attributed to a high-volume of deals completed in the Gaslamp this time a year ago, versus the re-emergence of larger anchor type retailers in the market place in 2012, who are traditionally lower rent payers,” the report states.
Cushman & Wakefield predicts the retail vacancy rate will drop to 7.5 percent in 2013, with Little Italy and the Gaslamp seeing rate increases.