SAN DIEGO—This is San Diego's eighth consecutive year of positive office absorption, with very little new supply added to market, causing vacancy rates to tighten and rental rates to rise, JLL managing director Tony Russell tells GlobeSt.com. The firm recently reported that class-A average monthly asking rental rates in the market are now $3.25 per square foot full service gross, having surpassed the previous peak at $3.23 FSG reached in 2007. And, overall asking rates for class-A and -B remain robust with 28% growth since the recession.
The report also revealed that class-B absorption increased by 356,490 through the first half of 2017, signifying that rents can be expected to increase in this segment. The scientific and technical sectors expanding and relocating to the Del Mar, UTC/Eastgate and Downtown submarkets have been the driving force for rent premiums, with newly delivered Torrey Point setting a new high-water mark with asking rates at $5.75 FSG, 76% higher than the class-A overall average.
We spoke with Russell about the factors driving office rents upward in this market and how much runway he thinks San Diego office rents have left.
GlobeSt.com: What are the factors driving San Diego's office rents to continue rising?
Russell: This is our eighth consecutive year of positive absorption. Since 2010, the San Diego office market has absorbed 7.4 million square feet of space, and there has been very little new supply added to market. As a result, the overall vacancy rate has declined from 17% in 2010 to 12% in 2017, so with a dwindling amount of supply, rents continue to increase. Since 2010, rents have increased approximately 27%.
GlobeSt.com: How much runway do San Diego office rents have left?
Russell: Rent will continue to increase for the foreseeable future due to the dwindling supply. Any new supply will require high rents due to the cost of construction. New developments today are achieving rents ranging from $3.50 to $5.50 per square foot per month, depending on the product type and the submarket—well above the average class-A rent in San Diego, which is $3.25 per square foot.
GlobeSt.com: Since this market was slower to recover than some other SoCal markets, is the runway longer?
Russell: Hard to say. I do not see rents declining for the next few years, since most developers are not going spec on new developments and they are waiting for a portion to be preleased. By doing this, supply will remain low, which will result in continued rent growth.
GlobeSt.com: What can we expect to happen with regard to San Diego office rents in 2018?
Russell: Rents will continue to increase at a modest pace, probably 3% to 4% per year.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
