Which City Is Leading San Diego’s Office Market?

Rancho Bernardo has seen the most significant office rental rate growth in San Diego County this cycle, according to research from JLL. The report analyzed rental growth for San Diego office product over the last seven years, and found the Rancho Bernardo submarket had a 21.3% increase in rental rates this cycle. In 2017 alone, the market had a 14.2% increase in rents. The second place market was Mission Valley, with 17.4% increase in office rents over the last seven years. The market overall also saw significant rent growth, up 28.8% in the last seven years. To find out more about the office rent growth in San Diego and what is driving the growth in the top markets, we sat down with Tim Olson, managing director at JLL, for an exclusive interview.

GlobeSt.com: Why has Rancho Bernardo seen such significant rental growth over the course of this cycle?

Tim Olson: In San Diego, we are seeing pretty substantial growth from the defense industry and from healthcare. The rental rate increase is mostly due to the ramp up in defense contracting business and healthcare. Additionally, a lot of the growth in the Rancho Bernardo came from growth in the class-B, multi-tenant sector. We saw a lot of growth in projects that are being updated and modernized. Owners are buying and upgrading assets and then are able to push rents pretty substantially. Those are really the two major contributors to the rent growth.

GlobeSt.com: Are you seeing mostly activity from defense and healthcare tenants in this submarket?

Olson: Rancho Bernardo is a diverse market. Sony owns buildings; British Aerospace owns buildings; Northrop Grumman owns buildings. We have a lot of big corporations, and a lot of the multi-tenants users are supporting that big industry of technology and defense companies.

GlobeSt.com: What other markets experienced significant rent growth this cycle?

Olson: Mission Valley, which was in the final with Rancho Bernardo. After the downturn, Mission Valley took a big hit because there is a large density of real estate and finance companies. After the downturn, there were a lot of vacancies in the market, and you saw softening of rents as a result. Since then, the market has stabilized with single-digit vacancy rates and healthy rent growth. It is a desirable central submarket with access to the main freeways and the main workforce. We have seen that market attract a lot of demand. There is also little new construction in that market, and you have had compression in rents for that reason as well.

GlobeSt.com: Why do you think that the market, in general, has seen such little office development?

Olson: This cycle, San Diego has been more of a redevelopment cycle. So, we have seen a lot of people rebuilding a class-B projects. A lot of class-B properties have sold during this cycle. You have really seen a repurposing of older vintage product into new modern facilities, which obviously command higher rental rates. A lot of the recent rent growth has been seen in that market.

GlobeSt.com: This research looked at the last seven years. Looking ahead, do you think that rental rates this year will continue to grow?

Olson: With the current demand in the market and leasing activity in the market, I think we will continue to see positive rent growth through the end of the year. There is not much new construction and the repurposing of product and improving second-generation buildings, you are going to see a continual trend of rent growth to justify that. In addition, high construction costs for tenant improvements and high construction costs for redevelopment of buildings is also factoring into continued rent growth.