Office
As with many markets around the country, office development in San Diego has ground to a near halt. Many projects are stalled in the pre-development phase or are just completed, but new groundbreakings are scarce. Cash flow is king, and landlords, who were happy to purchase partially vacant buildings a couple of years ago, are now eager to lease up their buildings as quickly as possible and have come to terms with the fact that they need to lower lease rates in order to do so. The average downtime for vacant space is 1 year and then some, so landlords are willing to make concessions, including more months of free rent and increased tenant improvements. Overall, tenants can expect to enjoy a 15 to 20 percent total lease value reduction compared to a year ago, and many tenants who signed at high lease rates several years ago are opting to re-structure their leases early in exchange for reduced rates.
Exceeding 25 percent in vacancy, the Carlsbad submarket has been especially hard-hit by the economic downturn, mostly due to overbuilding in that area. The ever-popular Del Mar and UTC submarkets have probably fared among the best, but still hover near 20 percent vacancy. 2009 will continue to be challenging for San Diego’s office market due to three factors: recently overbuilt markets, downsizing companies and lack of tenant rollover. 2010 may see more leasing activity, simply due to the fact that many leases signed in the hot market of 2005 will be up for renewal.
Industrial /Flex
In San Diego, industrial/flex properties sometimes cross over into the office category, and the two sectors tend to perform similarly. That said, industrial/flex has fared better in this market, simply because this sector wasn’t overbuilt to the extent of the office sector. Over time, the outlook for the industrial/flex market is strong, because technology, biotechnology, defense and light manufacturing are some of San Diego’s strongest industries. For this reason, San Diego’s industrial/flex sector has been less impacted than that of many other major cities.
Vacancies in the central San Diego area are lower than in the northern submarket and are highest in the southern market. Lease rates in the Torrey Pines submarket, home to many biotechnology companies, remain the highest due to the amount of improvement funds required to build laboratory space. Concessions are up throughout the county.
As with the office market, investment activity has slowed considerably in this sector due to strict underwriting requirements and lack of available financing, but the future looks bright for this sector.
Multifamily
San Diego’s multifamily sector has been a bright point in comparison to other sectors. The diverse economy has insulated San Diego better than many cities against dramatic job losses. Additionally, new construction has slowed significantly, and trouble in the financial markets has kept renters from becoming owners, although that could change in the near future.
Downtown, which saw a huge boom in condominium construction, now has a high rental vacancy rate as more and more developers turn for-sale units into rental units, thereby adding competition primarily in the Class A sector of the multifamily market. Rental rates have mostly remained steady throughout the county, though, and coastal areas from downtown north fare best.
According to Reis, the average asking rent in San Diego as of third quarter 2008 was $1,343 per month, a year-over-year gain of 4.5 percent. Vacancy at the end of the third quarter was 3.5 percent.
Retail
Like the multifamily market, San Diego’s retail market is quite strong comparatively, but vacancy is rising and rents are falling. According to Reis, neighborhood and community retail center vacancy rates averaged 4.3 percent throughout the county at the end of third quarter 2008, up 10 basis points from the previous quarter and the highest since 2001. The bad news is tempered by the fact that new retail development in San Diego is limited by land constraints, the area will remain relatively affluent and the diverse local economy will likely protect jobs better than in many other regions of the country. While 2009 will likely remain slow for San Diego’s retail sector, normal growth is likely for 2010.
Reis reports the average asking rent throughout San Diego was $28.99 per square foot at the end of third quarter. Limited retail real estate sales are still occurring and have been the strongest in the south county area, followed by the northwest county.
— Scot Ginsberg is executive vice president with Jones Lang LaSalle in San Diego.