Kirpalani: As with other Tier 1 markets throughout California and the nation, the owner-occupier sector of San Diego's office market is generally only about 10% to 15% of the overall market. This sector is not included in JLL's total office inventory of 78 million square feet and only impacts market statistics upon a change of ownership that would bring formerly owner-occupied buildings into the supply or, vice versa, a purchase by an occupier removing the building from supply.

GlobeSt.com: What are the factors at play in causing this difference?

Kirpalani: There are countless reasons occupiers decide to lease or own buildings, with many of the largest corporate users usually opting to balance their portfolio between owned and leased properties.

The benefits of ownership are numerous for occupiers. From the potential tax savings realized from real estate asset depreciation to the potential for mitigating increased operating expenses arising from fluctuations in market conditions, occupiers can realize financial efficiency and drive operating costs down, ultimately impacting their bottom line. At the same time, property ownership may benefit an occupier by solving a strategic need unrelated to monetary gains, such as buying a property deemed to have a strategic location adjacent to a current campus or buying a property with specialized improvements requiring operational autonomy unachievable through a lease.

On the opposite side of the coin, leasing can provide occupiers short- or long-term flexibility. Short-term leases provide immediate options for growth, while long-term leases provide tenants stable occupancy without the upfront costs and risks of ownership or development. This flexibility can be strategic in its own right, and many corporate occupiers prefer to maintain flexibility if they are growing or entering a new market.

GlobeSt.com: How does this distribution ultimately affect the San Diego office market?

Kirpalani: Typically, user sales/purchases in San Diego will have a small impact on the overall market, and the effects of those transactions will be limited to the submarket in which the transactions occur. For example, when the Arris campus was sold by Motorola in 2015, the project moved back into the supply inventory causing Sorrento Mesa's vacancy to suddenly spike. However, that sale opened the door for a large tech company to occupy a chunk of that space in 2016, and Sorrento Mesa's vacancy is heading back in the right direction. Similarly, the sales of the HP campus to Swift and the HD Supply building to Newport National put approximately 300,000 square feet on the market in the I-15 corridor, and Renovate America came in to lease approximately 160,000 at the HP campus while the property was still in escrow. The net-net is user sales typically create opportunities for other corporate users to lease and back-fill previously unavailable supply.

GlobeSt.com: What else should our readers take away from your Q4 San Diego office report?

Kirpalani: The San Diego office market is healthy entering 2017, with both net absorption and vacancy posting their strongest year end numbers since 2007. Rental rates are approaching peak in certain submarkets, but with overall market vacancy still above 10%, expect overall rental rates to continue their ascent steadily throughout the year. As a result of the tightening market, new speculative development will continue in Del Mar Heights with Kilroy Realty's One Paseo, Torrey Hills with American Assets' Torrey Point and possibly Downtown with Cisterra's 7th & Market project. While the current political environment has increased uncertainty on the macro level, San Diego's economy is expected to continue to grow and diversify its tenant base as more life-science and technology tenants seek to supply their workforce requirements by expanding into the region from outside markets.

SAN DIEGO—The owner-occupier sector of San Diego's office market is generally only about 10% to 15% of the overall market for a variety of reasons, JLL capital-markets VP Sach Kirpalani tells GlobeSt.com. According to the firm's San Diego Q4 office report the San Diego office market tallied 1.3 million square feet of positive net absorption in 2016, the highest annual total since 2007, and 20 of 26 office submarkets posted positive net absorption for the year.

Acquisitions by occupiers totaled $329 million in 2016, which was the highest annual total since 2004.

In fact, occupiers purchasing real estate may have helped push up the dollar volume of office-sales transactions, but occupiers transitioning from owners to renters are giving back large blocks of office space, the report also revealed. We spoke with Kirpalani about how the number of office occupiers compares to renters and the factors at play in the difference.

GlobeSt.com: How is the number of San Diego office occupiers who are owners compare to the number who are renters?

Kirpalani: As with other Tier 1 markets throughout California and the nation, the owner-occupier sector of San Diego's office market is generally only about 10% to 15% of the overall market. This sector is not included in JLL's total office inventory of 78 million square feet and only impacts market statistics upon a change of ownership that would bring formerly owner-occupied buildings into the supply or, vice versa, a purchase by an occupier removing the building from supply.

GlobeSt.com: What are the factors at play in causing this difference?

Kirpalani: There are countless reasons occupiers decide to lease or own buildings, with many of the largest corporate users usually opting to balance their portfolio between owned and leased properties.

The benefits of ownership are numerous for occupiers. From the potential tax savings realized from real estate asset depreciation to the potential for mitigating increased operating expenses arising from fluctuations in market conditions, occupiers can realize financial efficiency and drive operating costs down, ultimately impacting their bottom line. At the same time, property ownership may benefit an occupier by solving a strategic need unrelated to monetary gains, such as buying a property deemed to have a strategic location adjacent to a current campus or buying a property with specialized improvements requiring operational autonomy unachievable through a lease.

On the opposite side of the coin, leasing can provide occupiers short- or long-term flexibility. Short-term leases provide immediate options for growth, while long-term leases provide tenants stable occupancy without the upfront costs and risks of ownership or development. This flexibility can be strategic in its own right, and many corporate occupiers prefer to maintain flexibility if they are growing or entering a new market.

GlobeSt.com: How does this distribution ultimately affect the San Diego office market?

Kirpalani: Typically, user sales/purchases in San Diego will have a small impact on the overall market, and the effects of those transactions will be limited to the submarket in which the transactions occur. For example, when the Arris campus was sold by Motorola in 2015, the project moved back into the supply inventory causing Sorrento Mesa's vacancy to suddenly spike. However, that sale opened the door for a large tech company to occupy a chunk of that space in 2016, and Sorrento Mesa's vacancy is heading back in the right direction. Similarly, the sales of the HP campus to Swift and the HD Supply building to Newport National put approximately 300,000 square feet on the market in the I-15 corridor, and Renovate America came in to lease approximately 160,000 at the HP campus while the property was still in escrow. The net-net is user sales typically create opportunities for other corporate users to lease and back-fill previously unavailable supply.

GlobeSt.com: What else should our readers take away from your Q4 San Diego office report?

Kirpalani: The San Diego office market is healthy entering 2017, with both net absorption and vacancy posting their strongest year end numbers since 2007. Rental rates are approaching peak in certain submarkets, but with overall market vacancy still above 10%, expect overall rental rates to continue their ascent steadily throughout the year. As a result of the tightening market, new speculative development will continue in Del Mar Heights with Kilroy Realty's One Paseo, Torrey Hills with American Assets' Torrey Point and possibly Downtown with Cisterra's 7th & Market project. While the current political environment has increased uncertainty on the macro level, San Diego's economy is expected to continue to grow and diversify its tenant base as more life-science and technology tenants seek to supply their workforce requirements by expanding into the region from outside markets.