The outlook for San Diego’s office market is sunny and bright. Often considered a less costly option for office users as compared to other Southern California markets, San Diego holds consistent appeal for tenants seeking a coastal address where the weather is mild and the vibe is entrepreneurial and business friendly.
The market is following the national trend of stronger occupancy rates and robust absorption, buoyed by a healthy economy. At 10.2 percent in the second quarter — the lowest level in nearly 14 years — San Diego’s office vacancy rate beats the national office vacancy rate of 12 percent — the lowest level in 18 years, despite construction. These fundamentals are demonstrating increased tenant demand.
We’re continuing to see growth and expansion of office in submarkets throughout San Diego County. Sorrento Valley is one of the stronger office submarkets due to its centralized location and accessibility to major freeways. Other submarkets with heightened demand are Del Mar Heights, which is close to the ocean and suburban areas that house corporate executives, and Kearny Mesa, another major business center for the county. Carlsbad and Oceanside in North County and Chula Vista in South County are also popular choices. Oceanside and Chula Vista are two of the few submarkets in San Diego where land is still available for development in this market, so ground-up construction is active in these areas.
San Diego’s ambitious spirit and growth have attracted a large number of start-ups, fostering a culture of innovation that lends itself to creative office. We are continuing to see the rise of creative co-working and flex R&D spaces as industries outside of tech embrace the formats. This design includes flexible and open spaces where team members who frequently interact are seated in close proximity to facilitate communication and streamline operations.
The demand for fresh and innovative space, combined with the lack of developable land in most San Diego submarkets, have facilitated more adaptive reuse projects. Many investors are buying up older Class B and C office and industrial product to convert into creative office spaces, which capitalizes on this sustained trend.
While this can present an opportunity for significant value creation, one potential hurdle to these projects is securing competitive financing that meets the borrower’s business plan. Fixed-rate interest rates are at historic lows and could possibly go down further, meaning many portfolio or bank lenders remain aggressive and able to provide flexible prepayment options to meet the borrower’s exit strategy.
The key to obtaining financing is to first understand there is no one-size-fits-all approach. This is especially true for creative projects that involve renovations and, in some cases, brand-new concepts. As a result, it is critical to have an experienced finance partner who can communicate the strength of a unique business plan and how it meets the demands of a submarket.
Many of San Diego’s office submarkets attract thriving businesses from a range of industries. Current landlords and potential investors can find plenty of opportunity for growth, as long as they remain attuned to evolving tenant preferences and take steps to meet their demands.
— By Mitch Paskover, president, Continental Partners. This article first appeared in the September 2019 issue of Western Real Estate Business magazine.