San Diego’s office market has proven surprisingly resilient through the first quarter of 2022, with tenant demand on the rise and a favorable outlook as more companies bring employees back to the workplace.
“We’re definitely overall seeing an increase in leasing activity,” said Tim Olson, San Diego market lead for JLL.
The catch is that as companies try to lure workers back to the office, they’re looking for topnotch space.
“It’s the same story that we’re seeing across the country, which is a flight to quality. If companies are right-sizing, they’re seeking higher quality, more desirable space that is in close proximity to amenities or has amenities or has high quality build out,” Olson said. “Buildings that have been built since 2015 have seen leasing activity close to 61 million square feet across the country. Buildings that were built prior to 2015 collectively have all seen negative absorption. We’re seeing the same in San Diego. In certain markets, Class A buildings have no availability and have multiple tenants competing.”
In UTC, for example, Olson said that the vacancy rate at the end of the first quarter dropped to 9.8% compared to a countywide vacancy that JLL reported at 13.6%.
Back to Work
CBRE reported that despite uncertainty caused by the omicron variant of COVID-19, inflation and the war in the Ukraine, the office sector had 108,594 square feet of positive absorption in the first quarter of 2022 – the fourth consecutive quarter of positive absorption.
“Who would have guessed that there would have been positive absorption for the last four quarters,” said Mike Hoeck, senior vice president of CBRE in San Diego.
CBRE reported that office employment has nearly recovered to pre-pandemic levels.
Hoeck said that the trend of people leaving the office to work from home during the COVID-19 pandemic has been largely reversed.
“During the pandemic, we had clients who when their lease expired, they didn’t renew their lease. They had everyone work from home,” Hoeck said. “I’ve had about half a dozen of those clients come back around now and say, ‘No, we need office space. We need a location for all of our people to get together and collaborate.’”
Still, Hoeck said employers so far are looking for less space than they were before the pandemic.
“We’re in the first inning of the return to office and there’s not enough data points out there for employers to go make big commitments on space until they know how frequently they’re going to get their employees back into the office,” Hoeck said. “It’s going to be different from industry to industry and it’s going to be different based on company culture and the objectives of leadership within each organization.”
Conversion of conventional office space to life science is continuing to push office tenants out of submarkets such as Sorrento Mesa.
“The increased demand in lab space is starting to confront office users as investors have been going outside of core submarkets where they can convert old industrial and office space into Class A labs,” CBRE reported.
Hoeck said that will likely lead to an uptick in demand for office space in places such as Mission Valley.