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Tuesday, Mar 19, 2024
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Office Market Slows

Recovery Expected Later in 2023, Early 2024

Demand for conventional office space in San Diego County took a hit in the fourth quarter of 2022 as soaring interest rates and an overall cooling of the economy took their toll.

Office leasing activity that had been on an upward trajectory at the end of 2021 and beginning of 2022 did a sharp turnaround in the last six months of the year, down almost 50% posting 1.1 million square feet – the lowest level since the end of 2020, according to Kidder Mathews.

That downward trend is likely to continue for at least the beginning of 2023, according to Kidder Mathews and other commercial real estate brokerages.

On the bright side, JLL predicted that “the office market looks to rebound as we move through 2023 and employers are expected to enforce a return to the office plan.”

Jeff Gilbert
Vice President
Kidder Mathews

Jeff Gilbert, a vice president with Kidder Mathews, said that the performance and outlook for the office real estate market in San Diego varied depending on the submarket and individual property that’s up for lease.

Because of its diverse economy, “San Diego is in a good spot to weather the downturn,” Gilbert said, adding that demand remains healthy for office space among defense and health care companies.

“I think we just buckle up and landlords get aggressive with tenants and do their best to bring them into their buildings,” Gilbert said. “When the economy softens up, this is the time for landlords to get aggressive to improve their buildings, to provide employees what they want.”

Return to Work Boost

Longer term, Gilbert said that office space is going to do well as more companies require workers to return to the office.

“It’s hard for a business to have a company culture when everybody’s working from home,” Gilbert said. “One of the big drivers for our economy is the tech industry and you have a whole lot of engineers working together to create new technologies, new products. I just don’t know how that works if everyone works in their basement.”

Chris High, a senior managing director of Newmark, said that he expects the office market to take a turn for the better toward the end of 2023 into 2024, assuming interest rates and the overall economy stabilizes.

“We’re going to plateau for this year, (rental) rates are going to plateau, vacancies will plateau,” High said.

Steve Bruce, a senior managing director of Newmark, said that among all of San Diego County’s submarkets, demand for office space has been softest downtown, although Bruce said that property on the west side has done well.

“The east side assets are the ones that have been having the hardest time, that would be the B Street corridor,” Bruce said, adding that the growing number of homeless people on the east side have deterred some business from leasing downtown.

The strongest submarkets have been Sorrento Mesa, Sorrento Valley and Del Mar, Bruce said.

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