What's the Matter With Downtown?

Even though the office market continues to strengthen (see: steady absorption and thriving build-to-suit construction), Downtown still lags behind in the major indicators. What's with the spring slump?

Downtown vacancy increased nearly a point to 19.4%, while the suburban rate dropped to 12.8%, according to Colliers' Q1 office market report. Downtown also recorded significant negative absorption—nearly 100k SF—compared to nearly 700k SF of positive absorption for the suburban submarkets. The exodus of law firms, such as Latham & Watkins' move to a build-to-suit in Carmel Valley, hasn't helped. (Lawyers like order, not water. Landlords must've misheard them.)

Colliers VP Derek Hulse tells us hot sectors include professional services, niche markets like cyber security (thanks, Heartbleed), and the unmanned drone industry along the I-15 Corridor. Derek says much of the larger Class-A space has been taken and rents have been pushed up. He's seen landlords of Class-B space start to increase rates as well. Some submarkets are approaching 10% vacancy. That's when you start talking about spec office development. (If you start talking about it sooner, the unmanned drones will hear you and report back.)

LPL Financial was responsible for more than 414k SF of absorption in the UTC when it moved into La Jolla Commons II, offset by the 47k SF it left behind elsewhere in the submarket.

Derek points out that Downtown San Diego is in the southern part of the county, and most of the corporate housing is in North County, which is why companies choose to locate in places like UTC. Plus, people are seeking free surface parking, a big expense downtown. But all it takes is one big tenant to locate downtown to be near this young, educated workforce to start the migration back. Derek's doing his part to support Downtown, evidenced by this pic of him and his family at PETCO Park on a recent Sunday.