The office market in San Diego County reported its strongest leasing activity on record in the fourth quarter of 2014, according to a report released by DTZ, which states that tenants in the county absorbed 846,000 square feet of office space in the fourth quarter of last year.
The report came out on the same month that DTZ announced that it is now operating as a single global firm with Cassidy Turley following the completion of a 2014 acquisition by the private equity investment consortium backed by TPG Capital, PAG Asia Capital and Ontario Teachers' Pension Plan.
"The fourth quarter put an exclamation point on a very robust year for the office sector", said DTZ's Director of Research in San Diego, Jolanta Campion. "Collectively in 2014, tenants absorbed a staggering 1.4 million square feet, the highest level of occupancy growth we have tracked since 2003, and more than double the 10-year average annual net absorption level."
According to DTZ figures, Carlsbad has 113 office buildings of inventory, the most in any North County City by far, that offer nearly 4.4 million square feet of office space. The vacancy percentages are 16.5 percent for direct and 4.7 percent for sublease. The net absorption of square feet for the fourth quarter was 8,748 with 162,880 for the year of 2014.
County-wide office vacancy, including sublease space, decreased overall from 18 percent in the third quarter of 2014 to 16 percent in the fourth quarter. Direct vacancy for all classes, excluding sublease space, came in at 13.4 percent in Q4, compared to 14.6 percent in Q3 and 14.7 percent a year ago. By class, tenants absorbed 350,000 square feet of Class A space during the fourth quarter to bring vacancy in this segment to 10.3 percent at year-end. Notably, Class A direct vacancy has plummeted from its peak rate of 19.4 percent recorded six years ago in Q2 2009 to 10.3 percent in Q4 2014.
"As Class A supply becomes more limited, overflow demand to Class B space will lower vacancy in that segment as well," said Campion.
One of the key factors for the continued potent occupancy growth has been the backdrop of a positive economic climate fueled by job growth. Per the Bureau of Labor Statistics, the San Diego economy added 43,000 jobs in 2014, growing 3.2 percent. Employment in the professional & business services sector – the main office tenant – grew 5.9 percent (+13,300 jobs) in 2014, the largest job gain since 1999.
Ahead, a number of the large leases that were signed in Q4 2014 will be generating further absorption in future quarters as these tenants officially take occupancy.
Adding to this growth, the DTZ San Diego report indicates 2015 will unveil a significant amount of new Class A office development, much of it preleased. Of the nine projects totaling 1.3 million square feet currently under construction county-wide, eight are scheduled to be completed in 2015. In Carlsbad, Lots 10 and 11 in Bressi Ranch, the ViaSat Inc. project, is entirely preleased, one of three projects that are preleased in the county. The remaining projects are also significantly preleased.
Another project under construction in Carlsbad will feature 175,000 square feet of Class-A space at 5600 Avenida Encinas scheduled to be completed later this year. As of publication, that project is not preleased.
"Many of today's tenants seek newer, Class A product," said DTZ Senior Managing Director, Frank Wright. "Interestingly, while construction is on the upswing, many developers and their lenders are still reluctant to take the risk without strong preleasing in place."
With the numerous transactions already in place, plus a solid employment outlook, DTZ's report believes that the strong office momentum from 2014 will continue ahead.
The report came out on the same month that DTZ announced that it is now operating as a single global firm with Cassidy Turley following the completion of a 2014 acquisition by the private equity investment consortium backed by TPG Capital, PAG Asia Capital and Ontario Teachers' Pension Plan.
"The fourth quarter put an exclamation point on a very robust year for the office sector", said DTZ's Director of Research in San Diego, Jolanta Campion. "Collectively in 2014, tenants absorbed a staggering 1.4 million square feet, the highest level of occupancy growth we have tracked since 2003, and more than double the 10-year average annual net absorption level."
According to DTZ figures, Carlsbad has 113 office buildings of inventory, the most in any North County City by far, that offer nearly 4.4 million square feet of office space. The vacancy percentages are 16.5 percent for direct and 4.7 percent for sublease. The net absorption of square feet for the fourth quarter was 8,748 with 162,880 for the year of 2014.
County-wide office vacancy, including sublease space, decreased overall from 18 percent in the third quarter of 2014 to 16 percent in the fourth quarter. Direct vacancy for all classes, excluding sublease space, came in at 13.4 percent in Q4, compared to 14.6 percent in Q3 and 14.7 percent a year ago. By class, tenants absorbed 350,000 square feet of Class A space during the fourth quarter to bring vacancy in this segment to 10.3 percent at year-end. Notably, Class A direct vacancy has plummeted from its peak rate of 19.4 percent recorded six years ago in Q2 2009 to 10.3 percent in Q4 2014.
"As Class A supply becomes more limited, overflow demand to Class B space will lower vacancy in that segment as well," said Campion.
One of the key factors for the continued potent occupancy growth has been the backdrop of a positive economic climate fueled by job growth. Per the Bureau of Labor Statistics, the San Diego economy added 43,000 jobs in 2014, growing 3.2 percent. Employment in the professional & business services sector – the main office tenant – grew 5.9 percent (+13,300 jobs) in 2014, the largest job gain since 1999.
Ahead, a number of the large leases that were signed in Q4 2014 will be generating further absorption in future quarters as these tenants officially take occupancy.
Adding to this growth, the DTZ San Diego report indicates 2015 will unveil a significant amount of new Class A office development, much of it preleased. Of the nine projects totaling 1.3 million square feet currently under construction county-wide, eight are scheduled to be completed in 2015. In Carlsbad, Lots 10 and 11 in Bressi Ranch, the ViaSat Inc. project, is entirely preleased, one of three projects that are preleased in the county. The remaining projects are also significantly preleased.
Another project under construction in Carlsbad will feature 175,000 square feet of Class-A space at 5600 Avenida Encinas scheduled to be completed later this year. As of publication, that project is not preleased.
"Many of today's tenants seek newer, Class A product," said DTZ Senior Managing Director, Frank Wright. "Interestingly, while construction is on the upswing, many developers and their lenders are still reluctant to take the risk without strong preleasing in place."
With the numerous transactions already in place, plus a solid employment outlook, DTZ's report believes that the strong office momentum from 2014 will continue ahead.