A mid-year report by commercial real estate provider Cassidy Turley states that the San Diego County office market hit a speed bump in the second quarter of the year with 250,595 square feet of net negative absorption. The dip follows six consecutive quarters of positive activity, during which time tenants absorbed 1.8 million square feet.
Although direct San Diego County office vacancy (excluding sublease space) increased from 14.6 percent to 15.5 percent in the second quarter, it still is well below the peak vacancy rate of 18 percent recorded in 2009, the worst year of the recession.
"The office market has turned the corner, with many areas already transitioning away from a tenant's market," said Brett Ward, Managing Director with Cassidy Turley's in San Diego. "The second half of 2014 will be about continuing the growth trend and strengthening market fundamentals, both of which will move the San Diego office market into equilibrium with overall vacancy between 10 percent and 12 percent."
The 350,973 square feet of second quarter Class A absorption culminated 19 straight quarters of positive activity totaling 4 million square feet, or an average of 210,000 square feet per quarter. Class A vacancy of 12.2 percent compares to 19.4 percent in mid-year 2009.
"As Class A supply continues to deplete, overflow demand will pursue Class B product, in turn lowering vacancy in that segment as well," said Ward.
Cassidy Turley reports seven under construction projects totaling 1.1 million square feet countywide. Two of these totaling 341,403 square feet will be completed by year-end, with the remaining projects (737,121 square feet) set to finish in 2015. To date, preleasing is limited to the new Sempra Energy Tower in Downtown San Diego and Bressi Ranch Lots 10 & 11 in Carlsbad, both 100 percent committed, and to Spectrum Lab in Torrey Pines, which is 25.7 percent preleased.
"While construction is on the upswing, the development drama is only beginning, and it is about who will be the first few developers to deliver a product that is in short supply," Ward said. "With a large inventory of older buildings and the limited availability of new office space, there is a high demand for new construction or re-development to meet modern office requirements."
Cassidy Turley data shows that 70 percent of San Diego office inventory was built before 1990.
The countywide average asking rent for all classes combined in the second quarter was $2.40 per month per square foot full service. This is up from $2.30 a year ago but still well below the peak rate of $2.77 recorded in the first quarter of 2008. Compared to the same period of 2013, Class A monthly asking rent has increased 6.9 percent to $2.94, and Class B monthly asking rent has increased 2.7 percent to $2.28.
"Looking ahead, the re-emergence of small businesses and large corporate tenant growth will continue to be the main drivers of new leasing activity," said Ward. "Tenants in the market are looking for 3.9 million square feet over the next 24 months countywide, with central and south counties accounting for most of this demand. While not all tenants in the market will transact in the short-term, leasing activity is set to strengthen, further generating improved absorption and steadily declining vacancy."
Although direct San Diego County office vacancy (excluding sublease space) increased from 14.6 percent to 15.5 percent in the second quarter, it still is well below the peak vacancy rate of 18 percent recorded in 2009, the worst year of the recession.
"The office market has turned the corner, with many areas already transitioning away from a tenant's market," said Brett Ward, Managing Director with Cassidy Turley's in San Diego. "The second half of 2014 will be about continuing the growth trend and strengthening market fundamentals, both of which will move the San Diego office market into equilibrium with overall vacancy between 10 percent and 12 percent."
The 350,973 square feet of second quarter Class A absorption culminated 19 straight quarters of positive activity totaling 4 million square feet, or an average of 210,000 square feet per quarter. Class A vacancy of 12.2 percent compares to 19.4 percent in mid-year 2009.
"As Class A supply continues to deplete, overflow demand will pursue Class B product, in turn lowering vacancy in that segment as well," said Ward.
Cassidy Turley reports seven under construction projects totaling 1.1 million square feet countywide. Two of these totaling 341,403 square feet will be completed by year-end, with the remaining projects (737,121 square feet) set to finish in 2015. To date, preleasing is limited to the new Sempra Energy Tower in Downtown San Diego and Bressi Ranch Lots 10 & 11 in Carlsbad, both 100 percent committed, and to Spectrum Lab in Torrey Pines, which is 25.7 percent preleased.
"While construction is on the upswing, the development drama is only beginning, and it is about who will be the first few developers to deliver a product that is in short supply," Ward said. "With a large inventory of older buildings and the limited availability of new office space, there is a high demand for new construction or re-development to meet modern office requirements."
Cassidy Turley data shows that 70 percent of San Diego office inventory was built before 1990.
The countywide average asking rent for all classes combined in the second quarter was $2.40 per month per square foot full service. This is up from $2.30 a year ago but still well below the peak rate of $2.77 recorded in the first quarter of 2008. Compared to the same period of 2013, Class A monthly asking rent has increased 6.9 percent to $2.94, and Class B monthly asking rent has increased 2.7 percent to $2.28.
"Looking ahead, the re-emergence of small businesses and large corporate tenant growth will continue to be the main drivers of new leasing activity," said Ward. "Tenants in the market are looking for 3.9 million square feet over the next 24 months countywide, with central and south counties accounting for most of this demand. While not all tenants in the market will transact in the short-term, leasing activity is set to strengthen, further generating improved absorption and steadily declining vacancy."