Falling Occupancies, Rising Sublet Availabilities, Speculative Development Pile Up Across San Diego
By Joshua Ohl
CoStar Analytics
April 19, 2021 | 12:12 P.M.
At the end of the first quarter in 2021, the San Diego office market reached an all-time high for space available, with 19.3 million square feet, or 16% of San Diego's total office inventory. That includes any space that is available, regardless of whether it is vacant, occupied, listed for sublease or available on a future date, and includes only existing, under-construction and under-renovation buildings.
One year ago, at the end of the first quarter of 2020 and just as the country was beginning to come to grips with the onset of the pandemic, 14.4 million square feet of office space was available, or 12% of the total market office inventory, resulting in a year-over-year change of 4.9 million additional square feet of availability, representing 4% of total inventory.
That rise can be attributed to a few factors. Several projects have broken ground in the intervening year, most notably the Campus at Horton, a 750,000-square-foot tech and life science project in the core of downtown San Diego that is 0% pre-leased.
Occupancies also plummeted during the past year, falling by 1.7 million square feet. That was the worst performance in 20 years in San Diego. That led to the vacancy rate rising to 11.8%, a year-over-year increase of 2.4%, and the highest level in more than five years. It was also the largest percentage jump over four quarters since the height of the great financial crisis, when the vacancy rate jumped from 11.5% to 14.5% between 2008 and 2009.
San Diego’s office market has also endured considerable stress from the addition of sublet space. The amount of available sublet space increased by more than 40% over the past 12 months in San Diego, rising to more than 2.4 million square feet available, or 2% of San Diego’s total office inventory. Roughly 1 million square feet of available sublet space has lease terms longer than three years remaining, making them more competitive with direct space. The only quarter that more sublet space was available in the past 15 years was at the end of 2020, when there was an additional 40,000 square feet on the market.
But there were signs of life in the office market during the first quarter. Leasing volume increased to 1.2 million square feet, and while that was lower than any other quarter in the five years prior to the pandemic and 35% lower than the quarterly average during that same period, it was the first time that the volume of new leases exceeded 1 million square feet amid the ongoing pandemic.
TuSimple, a self-driving semitruck start up that filed for an initial public offering to become a publicly traded company at the end of March, added 31,000 square feet at La Jolla Gateway in the University Town Center submarket, more than doubling its current footprint at the property. TuSimple raised more than $1 billion for its IPO, receiving a valuation of roughly $8.5 billion.
Surgalign Spine Technologies leased 95,000 square feet in March at one of the newly renovated buildings at Muse Torrey Pines. The $100 million renovation completed in February, and only about 15% of the space in the three buildings was still available for lease at the end of the first quarter. Amenities include a fitness center, bike and surfboard storage and charging stations for electric cars.
Tech and life sciences firms accounted for the biggest leases in the first quarter, as opposed to traditional office tenants which have exercised much more restraint with space needs amid the pandemic.
And while workers are likely to begin returning to the office in the coming months as the vaccines become more widely distributed, the office recovery has yet to take shape locally.
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