San Diego Office Activity Falls in Third Quarter

In the third quarter, the San Diego office market continued to see declining conditions. In the third quarter, the vacancy rate increased to nearly 12% and office absorption was negative 429,281 square feet. As a result, in the first three quarters of 2020, the San Diego office market has seen 1 million square feet in negative absorption.

Demand did not improve, but in fact, dropped in Q3. Whereas Q2 posted 165,142 square feet of negative net absorption, Q3 continued to see demand drop by an additional 429,281 square feet,” Chris Reutz, research director for Colliers International’s San Diego Region, tells GlobeSt.com. “Q4 may likely see decreased demand as the COVID pandemic increases its infection rate during the fall and many office tenants continue to implement work-from-home policies.”

As a result, the office vacancy rate increased to its highest rate in three years. “This is largely due to new projects that were delivered in the last quarter, like Kilroy Realty’s two-building One Paseo office project that added 288,484 square feet of newly completed class-A space to the Carmel Valley submarket,” says Reutz. “With 11 buildings totaling more than 2.13 million square feet currently under construction countywide, the vacancy rates are likely to continue increasing in the coming months.”

Rental rates, on the other hand, were somewhat of a bright spot for the struggling office market. San Diego saw only nominal declines in the third quarter, compared to the second quarter. “Comparatively, the two quarters were relatively similar with marginal changes in rental rates.,” says Reutz. “After 30 quarters of continuously upward trending rental rate increases, the average asking rental rate in the county dropped by a penny to $2.92 a square foot per month. Specifically, the class-A average asking rate also dipped by one cent to $3.45 a square feet per month.”

The decreases in office leasing have significantly disrupted the market. “To put it into perspective, the large drop in demand in 2020 is the largest annual decrease recorded in the 25 years Colliers has tracked the office market in San Diego,” explains Reutz, who added that the decline in leasing activity has also impacted investment sales. “We’ve also seen many transactions put on hold, lost, or still in negotiations. Of note, we’ve also seen several short-term renewals take place across the county until companies can get a clearer picture on opening back up.”

Many of these trends are being dictated by work-from-home policies, which could stay in place until the virus is under control and even after. “Market uncertainty and the new way people work are the two main factors driving these changes,” says Reutz. “Many businesses continue to implement work-from-home policies that have resulted in a significant drop in the amount of space being utilized during a typical workday. Some tenants have experienced permanent layoffs, giving back unneeded space as they negotiate their lease renewals.”