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Build-to-Suits Dominate Office Development in San Diego

Office development in San Diego in 2019 was notable for what it lacked – available space. When 2019 ended, the availability rate in new space was less than 0.5%. Less than 260,000 square feet of net new supply was completed in 2019, or 0.2% of inventory.

CoStar; The Navy's 372,000-square-foot build-to-suit headquarters at Manchester Pacific Gateway in Downtown San Diego. (Manchester Financial Group)

Article via: Joshua Ohl, CoStar Analyst

January 14, 2020 | 02:21 P.M.

While Lift, a two-building campus in Carlsbad, was built by RAF Pacifica Group on a speculative basis, both buildings were fully leased by the end of the year, having received commitments from tenants including Honma and Ezoic. They also only totaled 50,000 square feet.

Kilroy broke ground on San Diego’s biggest current speculative development, One Paseo, in the first quarter of 2019. It spans nearly 300,000 square feet and is part of a mixed-use development that includes retail and apartment units, both of which were completed in 2019. Only about 20% of the space was available entering 2020, with tenants Acadia Pharmaceuticals, JPMorgan Chase and Deloitte all lined up to take down new space upon completion in 2020.

When Kilroy broke ground on 2100 Kettner in Little Italy at the end of 2019, the amount of available space under construction nearly doubled to 17%, or about 275,000 square feet. With the timeline for Stockdale’s redevelopment of Horton Plaza up in the air because of pending lawsuits, this will be Downtown San Diego’s biggest speculative office development since the end of the Great Recession when it delivers in 2021.

Build-to-suit projects for tech and life science firms remain at the forefront of San Diego development. In 2019, Takeda Pharmaceuticals moved into its new 165,000-square-foot building at Eastgate Terrace in University Town Center in the first quarter; ViaSat wrapped up its 350,000-square-foot expansion in Carlsbad in the second quarter; and MedImpact moved into its 160,000-square-foot expansion in the third quarter in Scripps Ranch.

Kilroy is also building one of those build-to-suits for Apple. The developer was underway on a 165,000-square-foot lab facility in UTC at 9455 TCD before Apple committed to take the entire building in the fourth quarter. Kilroy pivoted and will complete the project in 2020 as office space. BioMed is also preparing to break ground on Apple’s 204,000-square-foot building in UTC called Apex.

The lack of a deep speculative pipeline has helped control the vacancy rate and dampen expansion that San Diego’s industrial sector is currently experiencing. More than 90% of space is available in industrial buildings under development. At the same time, companies in expansion mode, such as Apple, will have to wait up to several years for their buildings to be ready when few new buildings can accommodate their requirements.

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