San Diego Office Q2 Report Analysis

Insights

While the San Diego market is facing challenges from declining leasing activity and rising unemployment rates, positive signs still remain. As seen in Q1, there is a strong demand for Class A properties, and rental rates are remaining high. Companies continue to value high-quality office spaces that offer unique amenities, prime locations, and high walkability for their employees. For office spaces in weaker submarkets or facing higher vacancy rates, landlords may need to offer improved tenant concessions, modern common areas, or flexible lease terms. 

A key factor influencing market demand is the performance of the tech and life science sectors, which are adjusting after their rapid growth phases. Sorrento Mesa, UTC, and Torrey Pines continue to be hotspots. 

As hybrid work continues to impact the office sector, companies may be looking for smaller, more flexible office spaces that create a collaborative environment. Spaces in coastal submarkets like Del Mar Heights and La Jolla will continue to command premium rents, as scenic views and outdoor amenities are highly sought after.

The rise of flex spaces could help Downtown lower its vacancy rate and create more opportunities for tenants. Converting vacant office spaces into residential or mixed-use properties would help absorb the vacant space in Downtown - the submarket with the highest office vacancy rate.

Net Absorption

For the eighth straight quarter, San Diego experienced a negative net absorption, with 33,981 square feet of space vacated. However, this is a significant improvement from previous quarters. Class A demand remained robust as it was the only property class with positive net absorption of 71,350 square feet.

Vacancy

The overall vacancy rate increased to 14.3%, up 10 bps from Q1. A significant factor was a portion of the Research and Development District (RaDD) being completed with no preleasing activity. This added 152,122 square feet of new office space to Downtown. This development contributed to Downtown’s vacancy rate rising to 26.6%, a 290 bps increase from Q1.

Class A and Class C properties saw improvements in vacancy rates. Class A decreased slightly to 17.6% (down 10 bps), while Class C saw a larger drop, falling to 7.1% (down 80 bps). Although Class B had vacancy rates decrease in four of the six submarkets, the overall rate increased to 13.8%, up 160 bps. This was primarily due to high vacancy rates in Downtown. Subleasing activity declined for the fourth straight quarter, now at 3.3%.

(RaDD, state-of-the-art life science and tech campus, developed by IQHQ)

Lease Activity

The San Diego market has continued to decline in leasing activity for the third consecutive quarter, now sitting at 0.9 million square feet. This is down 20.4% from Q1. Leasing activity stalling can be contributed to high inflation and a slowdown in the tech and life science sectors.

Despite this pullback in leasing activity, the average asking rent reached $3.33 per square foot. This increase was led by Class B and Class C properties as their rates increased 0.3% and 3.3% from Q1. Class A rents remained steady at $3.72 per square foot, slightly up from $3.71 per square foot.

Unemployment

San Diego’s unemployment rate reached a 12-month low in May, falling to 3.6%. However, it has since risen to 5.3%, 70 bps higher than the national average rate of 4.6%. 

(Data based on Q2 2024 Market Reports from CBRE and Savills)