San Diego County’s office market continued its slow postrecession recovery during the third quarter, as year-to-date leasing and property purchases remained ahead of 2010 trends and vacancies declined. However, experts say a summer of sluggish job growth and market volatility caused some wary companies to hold off on moving plans, although an improving high-tech climate is keeping office demand strong in some submarkets.
Lease renewals and lateral moves by tenants seeking out better deals still dominate the market, as rents remain flat, although a few investors made strategic property purchases during the latest quarter.
According to CoStar Group, the largest office property transactions of the period included the $80 million purchase of 110 Plaza in downtown San Diego by Los Angeles-based Forester Properties Inc.; the $41 million purchase of a Scripps Ranch building by Michigan-based Dart Development Group; and the $56.1 million purchase of a five-building San Diego portfolio by Newport Beach-based MIG Real Estate LLC.
Positive Net Absorption
Eli Gilbert, a senior research analyst in the San Diego office of brokerage firm Jones Lang LaSalle, said the local region has seen a half-million square feet of positive net absorption so far this year — more space being occupied than vacated — bringing the total vacancy rate to 16.8 percent, a small improvement from just over 17 percent a year ago.
More than half of the new absorption this year has come from two high-tech-heavy submarkets — Sorrento Mesa and Rancho Bernardo — which Gilbert said each have Class A vacancy rates around 6 percent, well below countywide averages. “Any time you have single-digit office vacancies in this economy, that’s a sign that the conditions in that submarket are pretty strong.”
He noted that Sorrento Mesa activity is fueled by Qualcomm Inc., which continues to expand its office footprint, as well as other telecom-oriented firms looking to locate in the vicinity. Rancho Bernardo has been bolstered by move-ins and expansions among a mix of defense, telecom and electronics firms, including Northrop Grumman, Broadcom Corp. and Nokia.
While the impact remains relatively limited in San Diego County, JLL recently reported that high-tech job growth — fueled by consumer demand for mobile gadgets and businesses’ application of new technologies like cloud computing — is in turn raising demand for office space nationally among tech firms.
So far, the impact is most pronounced in markets such as San Francisco, Seattle, Silicon Valley, New York City and Baltimore. Gilbert said that in coming years, San Diego could see similar effects because of its highly educated workforce, and the long-established and growing presence of firms such as Qualcomm, SAIC and Sony.
“The number of high-tech firms touring the San Diego real estate market has been steady for the past year,” Gilbert said.
At a recent local gathering focused on third-quarter trends, representatives of the brokerage firm Cushman & Wakefield noted that there is currently not much evidence that high-tech is having a countywide impact on office demand beyond those two submarkets and the life-science hubs of Torrey Pines and UTC.
However, they pointed to the Scripps Ranch office purchase in July by the real estate arm of Dart Neuroscience LLC, which plans to use the three-story building — formerly home to Nokia — for neuroscience-related research and development starting next year.
Cushman & Wakefield reported that year-to-date office lease activity, excluding renewals, is up 15.5 percent from a year ago, with just under 5 million square feet of lease signings.
While tenants retain a competitive advantage for smaller spaces of around 10,000 to 20,000 square feet, which remain plentiful, companies in search of larger venues are facing a different picture, as new construction remains virtually nonexistent.
“The really large blocks of space are becoming scarcer,” said Chris High, an associate director in Cushman’s San Diego office, noting that firms seeking more than 100,000 to 200,000 square feet are finding a dwindling number of locations to choose from if they wish to have all or most of their operations in one place.
For instance, brokers at both JLL and Cushman noted that the financial advisory firm LPL Financial is examining its options, including leasing and construction, to consolidate its UTC operations currently housed at multiple sites. LPL has been known for some time to be seeking ways to accommodate 350,000 to 400,000 square feet of office space in a central location.