SAN DIEGO—Local office tenants with expiring leases are likely to have signed their last lease near the bottom of the market, but rental rates have increased more than 17% countywide since then, JLL's senior research analyst Josh Brant tells GlobeSt.com. According to Lee & Associates, average asking lease rates in the region moved up in Q3 across all building classes to $29.36 per square foot, a .3% increase for the period. Class-A rents slipped $.39 to $36.77, but in UTC, where the Irvine Company just delivered its new office tower, the average asking lease rate has topped $45 per square foot, and class-B asking rates stood at $27.77, up $.21 for the quarter and $1.83 year-over-year. We spoke exclusively with Brant about office-lease sticker shock and what he thinks the outcome will be.
GlobeSt.com: What's behind the sticker shock that office tenants will be experiencing once their leases expire?
Brant: The last recession pushed office rents down significantly. In the overall San Diego County office market, rental rates last bottomed out four years ago. The most common length for an office lease is three to five years. So, if you are an office tenant with a lease that's about to expire, there's a good chance that you signed your last lease near the bottom of the market. In the past four years, countywide office rental rates have increased more than 17% on average. But, some areas and sectors have felt this increase more than others. Rental rates in UTC have increased about 44%, the greatest increase in rental rates of any local submarket over the past four years. Also, countywide class-A office rents increased 23.9% during that time, versus a 14.1% increase in class-B rates.
GlobeSt.com: How much longer do you anticipate rental rates to rise in this market?
Brant: A trend that we've been seeing in many markets across the country, particularly those of Southern California, is that the rate at which new supply is being built is much more proportionate to demand than in the previous cycle. Between 2004 and 2009, San Diego added 14 million square feet of new office product. Over the past six years, we've seen less than 5 million square feet of new product built. Developers and lenders are showing much more discipline in this cycle compared to last, which is aiding the rise of rental rates. Outside of a few global issues we're keeping an eye on, we're not too concerned about any severe threats to the national and local economies. So, aside from any large unforeseen crises emerging, San Diego should see continued and steady growth in 2016.
GlobeSt.com: What are landlords doing to prevent their tenants from not renewing due to sticker shock—or is this not a problem?
Brant: What landlords are encountering is that tenants are much more likely to really examine their other options now. This doesn't always mean moving to cheaper space. Some tenants decide that the rate alone isn't a deal breaker, but if they're going to pay top dollar, they want a space that better meets their needs. Landlords are trying to stick to their guns because they have seen the market tightening over the past few years. They are responding oftentimes by just trying to educate the tenant on the realities of the marketplace.
GlobeSt.com: What else should our readers know about increased office rental rates in the San Diego market?
Brant: It's very important to know the specifics of your situation. Even in rising markets, some submarkets are less tight than others. Although the countywide market bottomed out four years ago, some submarkets bottomed out three years ago, and some submarkets bottomed out five years ago. At times, submarkets appear to have a lot of vacancy, but the vacancy is mostly large blocks of space and smaller options are sparse, or vice versa. So, there are a lot of factors that make each situation different.
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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.
