SAN DIEGO-After two years of steady new development deliveries and increasing sublease options, supply dynamics have stabilized, rents have bottomed out and landlords have begun to scale back tenant improvement allowances at top office properties across the US and Canada, according to the inaugural North American Skyline Review from Jones Lang LaSalle. As a result of these supply-demand dynamics, investor interest for this type of product has heated up, causing activity and pricing to jump and yields to compress. But that isn’t the case in San Diego.
San Diego’s CBD, the Skyline buildings—defined as the top 20 class A and B high-rise office projects located Downtown--tell a different story. After 52,000 square feet of negative absorption, total vacancy in the Skyline inventory increased in 2010 to 17.6%, 70 basis points higher than the fourth quarter of 2009, according to JLL. Downtown law firms and financial services companies have contracted and consolidated, increasing overall submarket vacancy despite the moderate surge in government and education leasing activity over the last year.
The 20 San Diego Skyline buildings totaling 7.4 million square feet have a full service average asking rent of $27.96 per square foot per year (or $2.33 per square foot per month) and an average tenant improvement allowance of $27 per square foot. Deals signed today have an average free rent concession of three months, says the report.
Eli Gilbert, senior research analyst for JLL points out that the majority of deals being signed are renewals, expansions/downsizes, or tenants upgrading and taking advantage of market conditions within the submarket. “Despite occupancy losses from legal tenants, the government and education sectors are forecasted to continue expansion within Downtown,” says Gilbert. “That being said, we will not see significant upward pressure on rents in San Diego’s Skyline buildings for at least 12 to 18 months.”
In San Diego, no Skyline properties changed hands since 2008. The Irvine Co., which has a long-term hold business model, owns 40% of San Diego’s Skyline inventory. This concentration of ownership partly accounts for the lack of Skyline sales transactions recorded in the last few years, says JLL. In 2010, two properties came to market: Hines Interest’s 525 B Street and RREEF’s Emerald Plaza, but neither transacted. “Investor interest in the near term may be dampened by many factors including increased vacancies, state control over redevelopment funds and a potential new downtown homeless shelter, to name a few,” Gilbert says.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
