By Christopher Reutz, Research Director, Colliers
It’s no secret the San Diego County office market experienced unprecedented conditions in 2020. Yet, brighter days may be ahead for the local office market.
The COVID-19 pandemic caused many “non-essential” businesses to adopt work-from-home policies. San Diego’s office market took an incredible hit from this in early 2020, amounting to 450,000 square feet of negative net absorption. This was the biggest drop in local demand in more than six years. Last year recorded 1.8 million square feet of negative net absorption, while the first quarter of 2021 posted nearly 400,000 square feet of additional negative demand.
Christopher Reutz, Research Director, Colliers
The forecast for San Diego’s office market, though, is cautiously poised for an upswing. Demand began to pick up this last quarter as the percentage of vaccinated employees increased. Demand for office space also increased with net absorption totaling 16,000 square feet, signifying the wave of move-outs had finally passed. Additionally, while vacancy during the recession increased from 9.9 percent to a current rate of 14.2 percent, it still remains lower than historical rates recorded during the Great Recession. From late 2008 through mid-year 2011, vacancy remained in the 15 percent to 16 percent range.
While the national conversation has focused on the work-from-home trend negatively affecting demand post-pandemic, the San Diego office market is far more insulated than other markets due to its diverse industries. Tech, biotech, defense, communications and other industries continue to grow and require more space in San Diego. For example, since late 2018, Apple has absorbed nearly 1 million square feet within the county. Apple and other technology firms requiring collaborative work environments will continue to demand high-quality office environments.
Market-leading office developers are demonstrating continued confidence in San Diego. Kilroy Realty and American Assets are moving forward on office projects that will bring more Class A space to the market. The office inventory has also been slowly shrinking in some core markets as developers like Blackstone/BioMed Realty and Alexandria Real Estate convert these assets to highly sought-after life sciences spaces.
While the life sciences pipeline continues to grow, the office pipeline has been constrained by a lack of developable land and accelerating construction costs. Even though development isn’t entirely constrained, San Diego County office construction activity has only equated to 5 million square feet over the past 10 years. This is less than one-third of the more than 16 million square feet that was built in the prior decade. This will continue to diminish over the next decade as future office supply will be fulfilled through redevelopment of underutilized or outdated existing office and flex product.