San Diego Stands to Benefit from Congress’ Spending Bill

The San Diego office market stands to benefit from Congress’ $300 billion spending bill. San Diego has a history of working with the Federal Government, and the market is home to many of the industries, like healthcare and medical research, that are targeted by the new funding. This puts San Diego in a prime spot for increased office growth in 2019.

“Markets having a long history of doing strategic business with the Federal Government are likely to benefit most from Congress’ $300 billion spending bill—and San Diego is one of those markets,” Jolanta Campion, director of research San Diego and Nevada at Cushman & Wakefield, tells GlobeSt.com. “For example, the National Institutes of Health received significant increases in funding from the latest spending bill. Being one of the country’s medical research center and life sciences hubs, San Diego will likely benefit from increases in government grants and other funding to be awarded by the NIH.”

In addition to the medical and science industries in San Diego, defense continues to be one of the major drivers of the office market. “The Department of Defense was the biggest winner in the budget negotiations and San Diego, with a significant military presence and related operations—naval forces, marine core, defense contractors, etc.—will also likely be a beneficiary of increased DoD spending,” adds Campion.

While these industries will certainly benefit from the spending bill, the research institutes and universities are also driving growth. “San Diego’s close proximity to top research institutes and universities have become a catalyst for growth and great synchrony between local STEM graduates and prestigious biotech companies,” Brian Starck, executive director at Cushman & Wakefield, tells GlobeSt.com. “This allows for more organic internal growth within the San Diego region, providing a “stickier” relationship between San Diego employees and their employers.”

The combination of funding and tenant demand will also fuel development activity in the next year. Starck says that there is already a steady pipeline of new development in the market. “In addition to this, the majority of venture backed companies have gravitated to newer, class-A space in order to draw in top talent,” he adds. “With that being said, class-A properties in the Life Science market continue to lease and stabilize at a much faster rate compared to inferior product, resulting in fewer uncertainties to navigate when building new product in the market.”

The San Diego office market was late to recover following the last economic downturn, and Campion says that it has a longer runway ahead as a result. That is producing a strong environment for investors. “It has more upside than most other major markets across the U.S.,” says Campion. “San Diego is an ideal market for office development, given the absorption trend, and may even be underbuilt. Currently the 12th highest office rent in the country at $36.24 per square foot, full service, San Diego is still a relatively affordable market. Just 15 years ago, San Diego’s office rents were actually higher than San Francisco, whereas today its average is half of San Francisco’s rate of $72.30 psf. From an investment perspective, while San Diego real estate has gotten pricey, spreads still remain justifiable—even allowing for a nice buffer against rising interest rates. Further, San Diego office is not expensive relative to global cities. From a risk-adjusted basis, we believe San Diego remains a strong option to buy product. San Diego industrial also maintains strong fundamentals with strong pricing. Notably, overall industrial vacancy has remained at or below a very healthy level of 5% for the past five consecutive quarters, even with 1.9 million square feet of new product delivered in the last year.”