(Mark Your Calendars: RealShare REAL ESTATE 2012, March 22nd in Los Angeles).
SAN DIEGO-Vacancy levels continue to drop in trophy and class A office properties along San Diego’s downtown skyline submarket. With demand outpacing supply in this defined region, landlords have been able to scale back tenant improvements by 5% while increasing rents by nearly 3% at top office properties.
According to Jones Lang LaSalle’s annual North American Skyline Review, despite the drop in vacancy levels, skyline office buildings are still far from the occupancy levels of 2006, says John Sikaitis, director of US office research for JLL. Moreover, asking rates are at a 10-year low and vacancies are at a 10-year high, Joe Bernstein, SVP of JLL for the tenant representative side, tells GlobeSt.com. Still, the highest-quality buildings in the submarket are fairly well leased, he adds, noting the dichotomy between trophy properties and the overall submarket in terms of rental rates.
Away from the skyline submarket, the best downtown rental rates can be found on the east side, where deals are being completed for substantially below the landlords’ asking rates, Bernstein continues. For example, some buildings owned by the Irvine Co., a prominent landlord in the region, are leasing for $1.70 to $1.80 per square foot, despite an asking rate of $2.40. “Even though asking rates are low, they’re going 10% to 30% below that.”
Unlike most cities, San Diego’s CBD is not the most-sought-after submarket in the region. Bernstein tells GlobeSt.com that, in terms of high-end, class-A users, downtown is likely the third-ranking submarket, following Carmel Valley and UTC.
“Vacancy in the downtown San Diego market is lagging behind absorption in the suburban market, which is not uncommon for San Diego,” confirms Richard Gonor, EVP for JLL, representing the landlord side. “Vacancy is close to 18% [downtown].”
Gonor continues that relatively flat, slightly positive absorption has been seen recently in downtown San Diego, an improvement over last year, when absorption was negative. “We’re already starting to see positive direction in the CBD, particularly in these properties, thanks to the flight to quality. Also, there’s been some interest in the tech sector, which is new for the San Diego market.”
A handful of technology leases were assigned in this market in 2011, and the Irvine Co. opened up a floor of space in one of its skyline buildings for EvoNexus, a non-profit organization that gives free space to tech companies, Gonor adds.
“We are seeing landlords reinvesting money into the properties—particularly Irvine Co., but other property owners are doing that as well to differentiate from Irvine Co.,” Gonor tells GlobeSt.com. Varied layouts and finishes and creative space ideas are beginning to emerge thanks to new industries such as technology entering the San Diego market. CBD property owners are also trying to attract tenants that otherwise may not have considered the downtown market.
“There is some larger contiguous space available in the downtown market, and as larger users start dwindling in suburban markets, they will look at downtown and absorb some of these larger blocks of space in 2012,” Bess Wakeman, EVP for JLL tells GlobeSt.com. “Lease rates are so competitively priced downtown, even with parking costs thrown in, that compared to some suburban markets, it’s a better package.”
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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.
