Class-B Space Drives San Diego Office Activity

The San Diego market has rebounded dramatically since the great recession, with many submarkets bouncing back with significant rental gains since 2010. In an earlier story, GlobeSt.com reported that Rancho Bernardo and Mission Valley led the market in rental rate gains, according to research from JLL, but those submarkets weren’t alone. Overall, the market rents increased nearly 29%, and some submarkets, like Oceanside, managed to post top rental rate gains with the limited 1.1 million square foot office stock, while La Jolla has 19% rental rate growth in the last five years.

Little new office development helped to fuel some of the rental rate gains, but Tim Olson, managing director at JLL, pegs much of the responsibility on redevelopment in the class-B market. Most tenants wouldn’t have considered class-B space, but the redevelopment made it an attractive asset class while driving rents. That became a winning combination for the market. “We have had limited new development because of construction costs and limited availability of land,” Olson tells GlobeSt.com. “The class-B multi-tenant sector has doubled the amount of absorption of class-A product over the last two years. A lot of the rent growth has been seen in class-B multi-tenant properties.”

The renovated building—which Olson says have features like modern outdoor spaces, new exteriors and the interior spaces—garner premium rental rates for buildings that would have otherwise stayed vacant. He names the San Diego Union Tribune site as one example, but adds that there are several lower quality sites that fit the description. “We saw several of the lower quality buildings sell this cycle, and be renovated and updated, and owners were able to push rents on those properties,” explains Olson. “More than just rents, we have had pretty consistent absorption throughout this recovery cycle and in turn we have seen continued rent growth.”

While rents are definitely and important metric—they are only one metric. Looking at the market more broadly, Olson says that there is a lot to celebrate about San Diego’s office growth. “It is a factor of supply and demand, and we have seen a compression of vacancy rates throughout the county leading to positive absorption,” he says. “It is obviously a number of different factors, from limited new construction, limited new supply and continued positive absorption.”