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San Diego
Tuesday, May 21, 2024
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Older Buildings Dominate Office Market

San Diego’s real estate market for office space varies widely, depending partly on the age of the buildings as companies adjust to a post-pandemic world with space in newer buildings drawing the most interest.

At the same time, many companies strive to find the kind of space that will lure workers back to the office in a tight labor market.

Yet most of the office space in San Diego County – 70% according to Cushman & Wakefield – was built prior to 2000 and 40% of that was built in the 1980s. The rest was built even earlier.

Those older buildings just don’t cut it with employees looking for top quality space in which to work.

The buildings tend to be smaller and have floor plates of less than 20,000 square feet compared to the 30,000-plus floor plates of new buildings, said Derek Hulse, executive director of Cushman & Wakefield.

David Smith
Vice president and Head of Americas Insight
Cushman & Wakefield

They also don’t have the tenant lounges, gyms, lockers and outdoor spaces that are standard with newer buildings – what are now considered basic amenities, Hulse said.

San Diego is not alone in having a surplus of older buildings.

Nationwide, said David Smith, VP and head of Americas Insight for Cushman & Wakefield, “there’s a lot of office stock that was bult before 1990 and that stock tends to be less attractive to office occupiers right now,”.

“We are seeing a flight to quality,” Smith added, meaning that companies are leaving the older buildings for better quality offerings.

Options

San Diego’s office vacancy rate, which Cushman & Wakefield pegged at 14.8% at the end of the first quarter, was below the national average, but it still means that there’s room for companies to move, and the amount of sublease space coming onto the market has grown.

Nationally, Cushman & Wakefield reported that “as leases expire, the office product that has not adapted to changing demand is at risk of competitive obsolescence.”

“These shifting demand dynamics have accelerated the bifurcation between the office building that works for today’s economy and the office building that doesn’t work,” Cushman & Wakefield reported.

To stay relevant in today’s market, Smith said that building owners that have older office buildings will have to decide whether to upgrade their property if they want to attract top-dollar tenants, convert them to another use, such as housing, or tear the buildings down and start anew.

“Class B renovations could be something as simple as modernizing the common areas and interiors and creating a conference center,” Hulse said.

As an example of a successful repositioning, Hulse pointed to Centrum, an 11-story, 279,000-square-foot office building that Sunroad Enterprises finished in 2008.

Hulse said that the building was left vacant when its sole tenant left in 2019 and underwent renovations that lasted through 2022.

“We came in and did a full renovation,” Hulse said, adding a 12,000-square-foot lounge, a conference center, an on-site café with outdoor decking, showers and a gym.

By late April, Centrum was fully leased, Hulse said.

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