A humming economy always helps the office space sector, and this current growth spurt is no exception. San Diego’s office space trends are all positive.
Take vacancy. In the last quarter of 2016, it fell to 14.5 percent from the peak post-recession level of 21.7 percent, according to a recent report by Cushman & Wakefield.
Class A office space is particularly strong, the real estate services firm notes.
“Since peaking at 19.9 percent seven years ago, Class A direct vacancy has since plummeted to 11.9 percent at year-end 2016,” said Jolanta Campion, director of research of Cushman & Wakefield San Diego. “Class A still remains a prime choice for occupiers as leasing in this higher product class has been positive in 27 of the last 30 quarters.”
San Diego added 30,900 jobs year-over-through November 2016. Of those, 23 percent were office jobs in two sectors — business and professional services and financial activities — Cushman & Wakefield reported.
Office employment is forecasted to grow 4.2 percent in 2017, up from the 2016 forecast of 4 percent.
The innovation economy continues to help bolster the sector. For instance, the genome-mapping industry leader Illumina expanded to its sixth build-to-suit building, a 295,000 square feet facility in UTC — the largest Class A move-in during the last three months of 2016.
“The last time we saw a move-in of this magnitude was a year ago when Petco occupied its new 303,000-square-foot headquarters in Rancho Bernardo in Q4 2015,” Campion said.
Life sciences should continue to drive the market in 2017, according to Brett Ward, managing director, Cushman & Wakefield San Diego.
In addition to its most recent expansion, Illumina will also be branching out into a 316,000 square-foot space at Biomed Realty’s i3 in Eastgate, he said. Additionally, Eli Lilly will be expanding into 304,000 square foot in Campus Point, Otonomy will occupy a 62,000 square-foot, build-to-suit for its new headquarters in Eastgate, and the Medicine Company is expected to occupy the second Spectrum Lab building in Torrey Pines when completed later this year.
“There is a total of 15 buildings across all office product types currently under construction countywide — composed of approximately 1.1 million square feet — all are scheduled for 2017 deliveries,” Ward said. “In the life sciences sector, non-committed deliveries for 2017 are extremely limited — with virtually all new life science product already pre-leased — and not until mid to late 2018 will there likely be significant new deliveries to the market based on current proposed planned projects. Among the projects in the pipeline, seven are 100 percent preleased. Further, of the total 1.1 million square feet of product countywide, more than 75 percent already have commitments in place.”
Downtown San Diego continues to reap benefits from the innovation economy as well.
“Psyonix’s recent 40,000 square foot lease at 401 A Street represents the emergence of downtown tech companies that have expanded and decided to stay in our urban core,” said Derek Hulse, managing director at Cushman & Wakefield. “We expect to see more innovative companies downtown in the coming years and we are working on a lease right now with a major marketing firm migrating from another submarket because they realize in order to retain and attract the talent they are seeking they need to have a downtown presence.”
The downtown San Diego we see today is vastly different from just a few years ago, he notes. Four thousand residential units are under construction and another 6,000 are in various stages of planning. That’s drawing a young educated workforce to San Diego’s urban core. This educated workforce desires to live in close proximity to their place of work, which has helped fuel office demand and increase the presence of companies in the fields of marketing, media, design and technology, Hulse said.
Downtown San Diego’s office submarket closed 2016 with an overall direct vacancy rate of 13.7 percent, its lowest point since prior to the Great Recession, Hulse said. The Class A direct vacancy was 6.7 percent, its lowest level since the Dotcom-era more than 15 years ago, he said.
The trends are hardly limited to downtown and the life sciences cluster in the UTC, Torrey Pines, Towne Centre/Campus Point, Sorrento Mesa and Sorrento Valley region.
“Demand is strong countywide. The office market achieved more than 1.5 million square feet of positive annual net absorption in 2016, its highest level since 2005 when it absorbed over 1.9 millions square feet,” Ward said.
Will a Trump presidency have any impact?
The election of Donald Trump marked a major shift in U.S. policy agenda,” the real estate services firm said. “Although uncertainty remains, the push for fiscal stimulus from a Republican-led Congress and administration is expected to maintain growth over the next two years, with tax cuts and targeted spending increases accounting for much of the expected boost to headline GDP growth.
“Overall, San Diego has grown slightly faster than the U.S. as a whole throughout the current expansion, and job growth in the metro area has accelerated over the past two years. We anticipate the region will continue to outperform.”