The Relationship Between SD's Office Classes

Wolf: “The class-B market is not shrinking as much as it is changing into a segment where buildings have to be upgraded to remain competitive.”

SAN DIEGO—As San Diego’s class-A office market becomes tight with high leasing velocity and high rental-rate appreciation , the class-B segment is increasingly becoming more attractive to tenants entering the market, Newmark Grubb Knight Frank ‘s senior managing director Steve Wolf tells GlobeSt.com. A recent office report from the firm showed that while class-A net absorption activity outperformed class-B activity in Q1, the opposite was true in Q2, with class-B absorption exceeding class-A by more than 7:1 on a square-footage basis. We spoke exclusively with Wolf about the interplay between the two office classes in this market and where he sees them headed. GlobeSt.com: How do the class-A and class-B office markets in San Diego play off each other? Wolf: As the class-A market becomes tight with high leasing velocity and high rental-rate appreciation, the class-B segment is increasingly becoming more attractive to tenants entering the market. In order to achieve success and attract class-A tenants, class-B properties need to be priced 10% to 20% below class-A properties, and tenants are still expecting updated common areas and on-site amenities in class-B assets. GlobeSt.com: How do you see this playing out over the next year or so? Wolf: Well-located class-B properties that are upgraded with on-site amenities will continue to attract tenants looking for value. Many tenants in the TAMI sector ( technology , advertising, media and information-technology companies) are drawn not only to the overall value, but also to the opportunity to construct more unique, company-specific space that will attract and retain employees. We are seeing perimeter offices disappearing, floor plans opening up and trendy breakout areas and cafes replacing the rigid, closed layouts of the past. Young companies owned or dominated by Millennials are gravitating toward historic downtown buildings or older renovated class-B buildings, where they’re installing sustainable, casual interiors with flexible furniture systems and a high finish quality. Most are looking for an alternative to being on the middle floor of a class-A high-rise. GlobeSt.com: With so much redeveloping going on in the market, is the class-B market shrinking? Wolf: The class-B market is not shrinking as much as it is changing into a segment where buildings have to be upgraded to remain competitive. Class-B buildings need to have new lobbies, new landscaping and new signage at minimum. Also, many class-B properties are being transformed to specialize in the creative-office segment, with unique characteristics not found in class-A buildings. High ceilings, glass roll-up doors and immediate access to the outside common areas are some of the most popular new renovations in class-B redevelopment . GlobeSt.com: What else should our readers know about the San Diego class-B office market? Wolf: Tenants can achieve outstanding value for their company in a class-B office. In addition to the savings in rent, class-B properties can provide an opportunity for a tenant to brand and differentiate itself in a different way, versus traditional class-A buildings.