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San Diego Boosts Office Inventory

February 20, 2024

Last year ended with significant deliveries in San Diego, while developers are slowly planning new additions, pushing the metro at the top among peer markets in terms of construction starts. Office properties changed hands at one of the highest average sale prices across West Coast metros, despite the drop in sales volume since the start of 2023.

As of December, San Diego had 5.4 million square feet of office space underway across 28 properties, representing 4.9 percent of the existing inventory, above the national average of 1.7 percent.

Multiple Projects Underway

Construction starts in the market totaled 1.6 million square feet across 11 properties, representing 1.4 percent of total stock. Significant under-construction projects include IQHQ’s Research and Development District’s Phase I, a two-building life sciences campus encompassing 1.2 million square feet. Dubbed RaDD, the $1.5 billion project is the first urban life sciences waterfront development in the metro. Phase I includes the 729,903-square-foot RaDD Block 2B and the 396,154-square-foot RaDD Block 4B.

Another significant development underway is the 371,683-square-foot Campus at Horton’s Building 100, owned and developed by Stockdale Capital Partners, and expected to be delivered the second quarter of 2024. The property is part of a bigger, 1 million-square-foot mixed-use redevelopment in downtown San Diego that is also one of the largest adaptive reuse projects in Western U.S.

Year-to-date through December, developers completed 559,964 square feet of office space across four properties. Projects that came online in 2023 included the 212,851-square-foot La Jolla Commons’ Tower III, a Class A office building developed by American Assets Trust. The property is the latest addition to the three-building campus that now totals 930,687 square feet.

Another notable delivery was 4930 Directors Place, a 163,000-square-foot, Class A office building that came online in August 2023. The property is part of Healthpeak Properties’ two-building office campus dubbed Sorrento Gateway and is fully occupied by biotech company Sorrento Therapeutics.

In May 2023, Alexandria Real Estate Equities’ Scripps Ranch Technology Park’s Building A came online. The Class A low-rise life sciences building is at 10102 Hoyt Park Drive, totals 114,113 square feet and is fully occupied by Arrowhead Pharmaceuticals.

Office Deals Drop, Average Price Still High

Year-to-date through December, 1.7 million square feet across 20 properties changed hands in the metro for a total of $612 million. On a quarter-over-quarter basis, the sales volume reached $330 million at the end of the first quarter, while in the fourth quarter office investments decreased to $73.5 million.

Despite the drop in office sales, properties changed hands at an average $363 per square foot—still pricy when compared to other Western gateway metros. Assets in The Bay Area traded at a median price of $339 per square foot, followed by San Francisco ($322 per square foot) and Seattle ($267 per square foot).

One of the priciest deals in San Diego was Rexford Industrial Realty Inc.’s $148.3 million acquisition of 9233 Balboa Ave., a 250,000-square-foot, two-building office property in the Kearny Mesa submarket. The $200 million portfolio deal also included a 55,000-square-foot, Class B industrial building in the same area.

Another significant transaction was DivcoWest’s $86 million acquisition of a 72,506-square-foot Class A laboratory building. Situated within the Torrey Pines research cluster, the property was sold by Alexandria Real Estate Equities Inc. in May 2023.

In March, Vertical Ventures paid $72.8 million for the 233,000-square-foot Rose Canyon Business Park, a low-rise office building in West San Diego that includes office, retail and R&D space.

Increased Vacancy Rates

Year-to-date through December, the office vacancy rate in San Diego reached 17.4 percent, below the national average of 18.3 percent. The index fluctuated since the start of 2023—from 14.1 percent in January and 15.5 percent in June, the vacancy rate peaked at 18.2 percent in October, point after which it started to drop.

Across other similar markets, San Diego’s vacancy rate was the lowest, having been surpassed by Houston’s (23.9 percent), San Francisco’s (23.6 percent), Seattle’s (22.5 percent), Austin’s (21.1 percent) and The Bay Area (20.2 percent).

Significant leasing deals in the metro included the 87,000-square-foot office prelease signed by The San Diego Association of Governments at the 37-story West development. SANDAG’s commitment also marked the first office prelease at a speculative project in downtown San Diego in the past 20 years. The $450 million office project is developed by the joint venture of Holland Partner Group, North America Sekisui House and Lowe.

Also in August, Netherlands-based semiconductor manufacturer ASML leased 55,227 square feet at Via Del Campo Court II. The 80,720-square-foot office and R&D building is owned by Drawbridge Realty.

In February, the same owner signed a five-year lease extension at Discovery Corporate Center, a 230,000-square-foot office campus in the Rancho Bernardo submarket. The tenant, Broadcom Inc., is fully occupying the 90,610-square-foot Building A.

Attracting Notable Flex Office Providers

As of December, San Diego had 1.1 million square feet of shared office space, more than Nashville (664, 279 square feet), Charlotte (536,576 square feet) and Baltimore (205,502 square feet).

With the rate of coworking space as percentage of total leasable office space at 1.9 percent, San Diego outpaced the 1.7 percent national figure, and was on par with markets like Dallas-Fort Worth, Boston, Houston and Austin.

Year-to-date through December, Regus had the largest footprint of total leasable office space, with locations totaling 299,162 square feet. The company was followed by WeWork, with 145,877 square feet, Premier Workspaces, with 122,948 square feet, and Spaces, with 99,970 square feet.

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