Why Bay Area Tech Companies Are Migrating To San Diego

With more than 400 startups launched annually for the last two years, San Diego County now ranks in the top 10 metro areas nationally for startups and fourth statewide—behind Los Angeles, Santa Clara and San Francisco. The county is No. 1 in California for life sciences, according to CONNECT, a local innovation company accelerator. As a result, the innovation economy is now generating 25% of the region’s GDP.

“San Diego continues to be an attractive market to grow a business, and we are seeing consistent, steady growth in tech-related companies primarily in the UTC, Sorrento Mesa and Downtown submarkets,” CBRE San Diego VP Andrew Ewald (pictured), a tech and media expert, tells Bisnow. “San Diego continues to see both organic growth from local tech companies, as well as the relocation and expansion of companies from other US markets.”

According to CBRE’s annual Tech-Thirty 2016 list, which analyzes the 30 leading technology markets in the US and Canada in terms of high-tech and software/services job growth, San Diego is an affordable alternative compared to other major tech cities, making it a prime location for tech companies to expand or relocate. The report found the region’s tech population grew by 8% over the last year. The growing tech sectors in San Diego are cybersecurity, software development, Big Data analytics and robotics.

Andrew says smaller Bay Area companies are migrating to San Diego for several reasons: less traffic, lower cost of housing and lower real estate costs. “The cost of everything is lower in San Diego—including the average cost of real estate (37% less on average), cost of living and labor costs,” he says. “If a business owner is able to reduce their operating costs, it simply makes the business more profitable.” Andrew says salaries are about 28% lower here than in the Bay Area. For instance, the average salary for an app developer is about $102k annually in San Diego, compared to $141k in San Jose.

Bay Area companies are attracted to the San Diego region because of the strong Millennial labor pool, comparatively lower office rent growth (9% less), lower cost of living and great quality of life. “We’re benefiting from the relocation of small groups and expansion of large groups opening regional offices here,” he says. He adds startups are attracted by capital, and the San Diego region is No. 4 nationally for venture capital per capita.

Companies recently entering the San Diego market include BizApps, an early stage company that relocated to La Jolla. WeWork is opening an 80k SF co-working facility at 600 B St (shown above), which is also home to the San Diego Union-Tribune. Bay Area companies expanding their offices in the San Diego region include Service Now (UTC), an IT and app developer, and Houzz (Downtown).

The largest cluster of tech companies is in the biotech/med-tech sector and are concentrated in the central markets—Sorrento Mesa, UTC and Torrey Pines. “This concentration has to do with the nature of the work and the type of property available,” Andrew says, pointing out these companies require larger floor plates and need lab or engineering space, as well as different infrastructure not seen in high-rise buildings in San Diego.

Shown is a rendering of the i3 campus under construction in UTC's biomed cluster. Illumina has inked a 10-year deal for the entire 316k SF of flex office and R&D campus.

“Downtown, in comparison, is a high-rise market, suited to tech companies with more traditional desk work, like game and software development and digital media services,” Andrew says.

There is spillover of med-tech into North County, which also includes e-commerce companies and diverse manufacturing activities, he says. These include businesses specializing in action sports, soft goods, lifestyle products and wireless technologies. This spillover has sparked new speculative industrial development, primarily in Carlsbad, Andrew says. “Although rents are slightly cheaper than in Central submarkets, and there’s new product available," he says, "I don’t expect a mass migration to North County from the central tech clusters."

Shown below is a new creative industrial project. The planned 144,461 SF project, dubbed cre•ate, sits on 9.7 acres at the Carlsbad Oaks North corporate business park. The project, by local developer RAF Pacifica Group, is designed for a company that wants its corporate headquarters and production facility under one roof.

According to the report, tech-related office leasing accounted for 20% of all office leasing in the US in the first half of 2016, up from 18% despite an overall slowing in tech job creation. Fueled primarily by the demand for highly skilled tech talent, the East Cambridge, Palo Alto and Santa Monica submarkets are significantly outperforming their overall markets in terms of leasing activity and rent premiums.

As of Q2 2016, Sorrento Mesa was San Diego’s top tech submarket with an average asking rent of $36.12/SF a year, and a vacancy rate of 19.1%—a 13% increase from last year. Sorrento Mesa ranked 20th in the top tech submarkets in terms of office rent growth from Q2 2014 to Q2 2016. Downtown San Diego, however, is catching up to submarkets like Sorrento Mesa and UTC, as developers now offer amenities that attract tech tenants, including creative work environments and more competitive office prices.

The highest rent growth from 2014 to 2016 occurred in both established and up-and-coming tech submarkets, illustrating stiff competition among tenants to locate in areas rich in talent such as University City, Oakland/East End Pittsburgh, East Cambridge, Palo Alto and Tempe.

San Diego ranked 11th nationally in office rent growth, growing by 13.6% between Q2 2014 and Q2 2016 to an average asking rent of $32.71. It remained the most affordable compared to Los Angeles ($35.02), San Francisco ($72.71) and the Silicon Valley ($55.08). San Diego’s vacancy rate remained at 12.6% during that period.

Downtown San Diego's tech sector is growing, as developers create more office product attractive to tech users. Pictured is Lowe Enterprises' new IDEA1 rising in the upper East Village I.D.E.A District. The project includes 292 apartments, 7k SF of co-working space, 7k SF of retail uses and a central courtyard for socializing, sharing idea, and events, called the Idea Hub.

For the fifth consecutive year San Francisco led the high-tech industry for job growth, with base high-tech jobs increasing by 47% between 2013 and 2015. San Diego’s high-tech job sector grew 8% percent during the same period. According to CBRE’s Tech Talent Scorecard 2016, San Diego ranks 16th nationally for tech talent.

Over the past five years, the software/services industry created 780,000 new jobs, representing a 7.3% percent growth rate and accounting for nearly 20% of leasing activity. In H1 2016, tighter labor and volatile capital market conditions led to a slowdown in job creation to 4% annually, slightly impacting certain office markets, like Washington, DC, New York and the San Francisco Bay Area.

“Advanced technology has integrated itself into business productivity and although the talent pool is limited, strong demand for technology services from both businesses and consumers is expected to support hiring by high-tech firms,” said report author Colin Yasukochi, CBRE director of research and analysis. “The skills of the available labor pool do not appear to align with available jobs, causing a structural barrier to growth. This demand for technology should support growth among high-tech companies and high-tech office market clusters.”