San Diego Office Recovery Gains Momentum

The San Diego office market is continuing to recover. In the third quarter, the market posted 269,000 square feet of positive absorption, marking the second consecutive quarter of growth, according to a new report from Colliers. Prior, San Diego had five consecutive quarters of negative absorption.

The office leasing demand in the third quarter reached levels not seen since 2018 and 2019, and according to the report, it is a sign that the office market has turned a corner. The activity has triggered new class-A development from major companies, like Kilroy Realty, American Assets Trust, and Lincoln Property Co. In June, Kilroy acquired a 1.3-acre land site for $42 million in Downtown San Diego to build a 275,000-square-foot office tower. The property is directly adjacent to the firm’s 220,000-square-foot 2100 Kettner development, illustrating the firm’s bullishness on the market. In total, there is 1.4 million square feet of new office space under construction.

The leasing activity represents true market absorption because no new projects delivered in the third quarter. Most of the positive absorption in the quarter was in the class-A market. By the end of the year, Colliers expects class-A office to net positive demand for the year, despite negative absorption in the first quarter. Kilroy was also among the companies to benefit from the demand in the third quarter. In September, the firm completed three major lease transactions in San Diego with publicly traded life science and biotech companies. The lease deals total 330,000 square feet, and will involve the redevelopment of current office space into life science facilities.

In addition to the strong leasing activity, other metrics also showed improvement. The office vacancy rate inched down 32 basis points in the third quarter, settling at 13.5%. Class-A vacancy is down a full percentage point to 14.9%, and class-C availability is the lowest at 9.2%. Asking rents also continued to improve to $2.98 per square foot for the County, and $3.53 for class-A rents. The sublease market also improved with vacancy in that market segment falling 26 basis points to .89%, dipping below 1% for the first time since the beginning of the pandemic.