San Diego’s 62.8-million-square-foot general purpose, multi-tenant office arrived at the 2012 mid-point with the same high vacancy that has dogged this market for years, but rents are still rising and net absorption positive. Cassidy Turley notes the market is following the path of “gradual improvement.” “The San Diego office market continued its steady, but slow, recovery throughout the first half of 2012,” noted Cushman & Wakefield.
Reis reports a second quarter 2012 vacancy rate of 17.3%, down 20 basis points from the prior quarter and 100 from a year earlier. Vacancy had finished 2011 at 18.0%, close to where is had been since 2009. The Class A rate finished second quarter at 16.6%, down 170 basis points year-over-year, while the Class B/C rate finished the quarter at 17.9%, down 60 basis point over the quarter and down 40 over 12 months.
Overall vacancy fell 130 basis points to 15.4% over 12 months, Cushman & Wakefield reports. “Countywide total vacancy for all classes, including sublease space, was 18.3% in the second quarter of 2012 compared to 18.7% last quarter and 19.5% a year ago. The current vacancy of 18.3% is 3.3 percentage points lower than the peak rate of 21.6% recorded at the end of the recession,” the third quarter of 2009, according to Cassidy Turley. According to Voit Real Estate Services, vacancy “finished the quarter at 14.24%, a decrease from the previous quarter’s figure of 14.7%” and the lowest rate recorded here since mid-2008. Reis forecasts vacancy to finish 2012 at 16.7%., followed by a gradual descent to 15.0% by 2015. That, however, would still be far above the previous cyclical low of 10.8% recorded in 2005. Below the U.S and West region averages in the past, San Diego’s vacancy rate is about average today.
SUPPLY AND DEMAND
The San Diego office market saw net absorption dip slightly in the second quarter of 2012. After posting 462,000 in 2011, and just over 300,000 in the first quarter, the second quarter followed with a weaker 137,000 square feet. It should be noted that this market does not have a strong history of demand. Reis reports a total net absorption figure of negative 779,000 square feet for the 10 years ending in 2011, while over 9 million square feet of new space was added in that time span. The increase in the multi-tenant inventory was far less shifts to owner occupancy through owner-user purchases, which as popular in San Diego. Fortunately for the market, 2011 was a quiet year for completions with only 83,000 square feet, and no multi-tenant space is set to complete in 2012. There was no flight to quality in the second quarter. Reis reports second quarter Class A net absorption at negative 48,000 square feet, while Class B/C absorption totaled plus 185,000 square feet.
“The San Diego office market posted 463,997 square feet of positive net absorption this quarter, the ninth quarter of positive net absorption of the last ten quarters,” according to Voit. According to Cushman & Wakefield, “countywide net absorption of 406,712 square feet reached ahead of the level seen at this time last year.” This source notes that the current quarter “marks the sixth consecutive quarter of positive direct net absorption resulting in decreased direct and overall vacancy rates.” Colliers reports second quarter net absorption totaled a positive 80,994 square feet, adding to a total of 383,241 square feet for the first half of the year. The increase in absorption by smaller tenants noted last quarter occurred in second quarter “and will likely continue throughout the rest of 2012,” Colliers notes. Reis forecasts net absorption will total 783,000 for 2012, followed by slightly over 1 million the following years. New supply, however, is expected to resume in 2013 and average slightly under one million square feet per year through 2016. Reis currently reports just under 1 million square feet under construction in three projects. The result will be a very gradual decrease in the vacancy rate.
Rents have not performed particularly well in San Diego, but asking and effective rents managed to post 0.2% gains in the second quarter. The rates are reported at $28.17 psf and $22.77 psf, up 0.9% and 1.1%, respectively, over 12 months. This is a common San Diego office market scenario, in which modest quarterly rent gains manage to accumulate into decent, if not impressive, annual ones. Reis reports the Class A asking average at $32.85 psf, up 0.2% for the quarter and 1.0% year-over-year, with the Class B/C average at $24.02 psf up 0.3% for the quarter and 0.8% year-over year.
Voit Commercial reports an average asking lease rate of $25.44 psf. This source gives a Class A rate (FSG) for San Diego County of $30.12 psf. Jones Lang LaSalle reports a Class A overall asking rent of $31.20 psf, and a Class B overall asking rent of $24.12 psf. “Tenants are still able to get relatively good deals on remaining spaces in the market, but the window of opportunity is closing quickly as some owners are beginning to push rents and increases,” according to this source. According to Colliers, “the countywide average asking rental rate for all classes bottomed out at the end of 2011. Six months later, the average asking rent rate has remained at the bottom exhibiting only a slight increase,” to $25.32 psf. Cassidy Turley reports “the average countywide Class A asking rent inched up 80 basis points” to $31.56 psf. The overall countywide monthly average asking rent for all classes was $26.64 psf in the second quarter according to this source, “unchanged since the third quarter of 2011.”
Reis forecasts asking and effective rent gains of 1.3% and 1.6%, respectively, for year-end 2012, followed by slightly more substantial increases in the years to follow. The effective average is predicted to increase by 3.0% in 2013 and around 4.0% during each of the next three years. San Diego’s asking rent gains, however, are forecast to be at or below the U.S. and West region averages during the forecast period.