San Diego Office Q1 Report Analysis

The overall office vacancy rate decreased slightly to 14.2%, down 0.60% or 30 basis points from Q1 2023. Class A and Class A + properties are attracting the strongest leasing activity due to their amenities and prime locations. Despite the demand for higher-quality spaces, there was a negative net absorption of -151,000 SF, mainly driven by vacancies in Class A offices.

Leasing activity for new office space was slow in Q1 (267,000 SF across the market). This is a slight increase from Q1 2023 when it was 217,000 SF. Major companies like Apple and Illumina announced a large number of layoffs during the quarter which contributed to the lower leasing demand. Unemployment is slightly higher in Q1 2024 (4.7%) vs. Q1 2023 (3.7%). 

There is no slowing down on the development side with 1.1M SF of office space under construction - only 40% of this new supply is pre-leased. Over half of the inventory is located in Downtown which does raise vacancy concerns but shows investors' confidence in the market’s potential. 

I found it very interesting how vacant office properties are being acquired by investors/developers and converted to residential or hotel use. This removed nearly 500,000 SF from the office inventory, causing the overall vacancy rate to lower.

Moving forward, I believe landlords may need to enhance common amenities and offer increased concessions to improve leasing activity. Modern fitness centers, on-site coffee/dining options, lounge spaces, and rooftop terraces could help differentiate properties and attract tenants. Reduced parking and tenant improvement allowances could help as well.

(Data based on Q1 2024 Market Report from Cushman & Wakefield)