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Thursday, Mar 28, 2024
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Growing Workforce Needs More Space, Office Solutions

Near record low unemployment levels in San Diego County are hitting the commercial real estate market by driving down vacancy rates and contributing to rising rents, primarily for office space.

“More than any other type, office is tied to jobs and job growth,” said Michael Combs, research manager for CBRE in San Diego.

The county unemployment rate in April dropped to 2.9 percent, according to the state Employment Development Department — the lowest it’s been since December 1999 when it was 2.6 percent.

That compares with a county unemployment rate of 3.2 percent in March and 3.9 percent a year ago.

Over the past year, San Diego County has added 32,100 non-farm jobs, an increase of 2.2 percent.

Professional and business services followed by construction were the two biggest categories for job growth, with professional and business services adding 14,100 jobs between April 2017 and April 2018.

About 4,900 construction jobs were added during the same period.

While construction jobs do little to increase demand for office space, increased employment in professions and professional services is a factor.

“The effects are somewhat mixed, depending on the type of employees affected,” said Ron Miller, a senior vice president of Colliers International in San Diego.

“At the top is medical/nursing. Nursing is the highest in demand and it’s number one in the top 10 occupations by unique job postings, then come software developers,” Miller said. “Both tech and medical companies are gobbling up a lot of office space.”

He said vacancy rates for office space across all classes of buildings averages about 11.4 percent countywide.

“It’s starting to hit record lows,” Miller said. “It’s been trending down quarter, after quarter, after quarter.”

In submarkets such as downtown, Mission Valley and Kearny Mesa, the office vacancy rate for top-of-the-line Class A space has dropped into the single digits, Miller said.

Faced with the prospect that they’ll have to pay more for the space they’re in or to find room to grow, some companies are responding by taking a hard look at the way they arrange their workspace.

“If there’s a trend toward consolidating some of that space, we could see job growth without seeing an increase in absorption,” said CBRE’s Combs.

The push for so-called open, creative office space has been an ongoing trend, but it’s getting a boost by the drop in unemployment.

“Many floor plans and the way companies are now using their space are inefficient,” Miller said. “We advise them to kind of resize their office in a more efficient manner.”

Typically, that means eliminating or reducing the number of private offices so less space is required for each worker.

Coincidentally, that coincides with what many tenants seek as a way to recruit and retain younger workers who value collaboration and a more open environment.

“It’s all about reducing your real estate costs,” Miller said.

Colliers did that with its own offices in UTC and Carlsbad, as did CBRE with its offices in San Diego and elsewhere.

“We were traditionally housed in private offices,” Miller said. “We’re going toward work stations in a more creative manner where we can put teams together in a lot less square footage.”

Miller said the office rents that landlords are seeking average $3.25 per square foot over all classes of office buildings, but top $4 a square foot in a few submarkets, such as UTC and Carmel Valley and will likely reach $6 a square foot in Manchester Pacific Gateway, which broke ground on the downtown waterfront June 1, and Kilroy Realty’s One Paseo project in Carmel Valley, which is under construction.

Given the low vacancy rates, continued low unemployment and demand for more space, the likelihood is that rents will continue to rise throughout 2018, according to several brokers.

The chances of getting higher rents are prompting some building owners to renovate, bringing what were Class B buildings to Class A standards by adding amenities and giving their older buildings a facelift, Combs said.

“You’ll see investors and landlords invest in their property to elevate the property,” Combs said. “We’ve seen some low Class A and even some much older Class B property see significant investments to try to compete in that Class A environment. Sometimes that’s as simple as lobby improvements, or strengthening the amenities.”

The effect of low unemployment rates and a robust economy on the industrial and retail real estate market is harder to peg than the effect on office product, Combs said.

“In an office environment, you’re adding more people. It’s a little more complicated in retail or industrial, where maybe the investments are in technology,” Combs said. “Maybe you can invest in that new piece of technology or invest in more machines. You don’t necessarily need more people.”

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