San Diego Office Parties Like It's 2007

For the San Diego office market, strong fundamentals have landlords partying like it's 2007. 

Colliers' Tim Cowden and Chris Reutz gave us the skinny on San Diego's office market performance, which showed demand was strong in the past year. So strong the overall market absorbed 1.72M SF--the most absorption in nine years, led by Rancho Bernardo, which posted nearly 193k SF in absorption and UTC, which tallied 76k SF in absorption in Q4 alone. That was driven partly by Scripps Health's 131k SF expansion. The overall vacancy rate now stands at 12.2%, beating out the previous low of 12.3% in 2007. 

The duo says the market only looks to get better from here, especially as a lack of new development will keep tenants focused on existing inventory. “There is a finite inventory of buildable land for office space, and we're getting close to the limits of that in some submarkets where you'll have to tear down office buildings to build new ones,” Tim (here with his family building a snowman during New Year's Eve's freak snowstorm) says. This also translates to better rental rates for landlords: nearly $2.30/SF by year's end for all space, and edging closer to $3/SF for Class-A space, they say. 

There is currently a dichotomy in the performance of Downtown San Diego. The submarket's 10M SF of office space remained flat this year. And its official vacancy rate stands at 18.4%. But Tim says that will soon change given plans to convert two prominent office buildings into other uses, including the former Trobati Building at 625 Broadway, which is being converted to apartments; The Paladion at 777 Front St (here), the 156k SF office building that is expected to be converted into a condominium project; and 600 B St, where Lincoln Property is looking to convert the lower half of the 24-story tower into a hotel, Tim says. “Rather than being 20% vacant … it's really 13% vacant effectively,” he says.