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Downtown San Diego’s Office Market Has a Long Path to Recovery

Speculative Construction, Rising Availabilities and Sublet Space Becoming Synonymous With Downtown

By Joshua Ohl CoStar Analytics April 27, 2021 | 12:20 P.M.

“If you build it, will they come?” certainly feels like the apropos line of questioning for downtown San Diego given its recent history.

Not only is there more than 1 million square feet of office space under construction there right now, but 100% of that space is available for lease, a leading reason that downtown’s availability rate is 31%, the highest level in 15 years.

The Campus at Horton, a 750,000-square-foot project geared toward tech and life science firms, recently held its topping-off ceremony and is scheduled to deliver in mid-2022. The $550 million transformative project from Stockdale Capital Partners has not secured any tenants yet.

Kilroy is also nearing completion on the $62 million, 235,000-square-foot 2100 Kettner in Little Italy. Like the Campus at Horton, no tenants have yet signed for the new building, which has become a common theme for new buildings in San Diego.

There is also roughly 1 million square feet of available space in office buildings that have been renovated since 2018, a primary reason that the vacancy rate is near a record high, above 20%. The Paladion, Genesis — the former Thomas Jefferson School of Law — Kettner & Ash and Tower 180 are among the recently completed full-building renovations that have had little success securing tenants.

The recent announcement by Apple that it intends to increase its local headcount from 1,000 to more than 5,000 within the next five years has landlords in downtown salivating at the prospect of reeling in the tech juggernaut. But even those that fail to land the white whale will benefit if Apple chooses downtown, as it would likely be a clarion call to others that downtown can compete with the UC San Diego area and Sorrento Mesa for those types of companies. The announcement also has downtown’s apartment landlords salivating at the prospect of filling more apartments with renters who won’t have to leave the market for high-paying jobs to the north. U.S. Census Bureau data shows that 90% of downtown’s residents drive more than 10 minutes for work (at least pre-pandemic).

The 4.6 million square feet of space available downtown — which includes any space that is available, regardless of whether it is vacant, occupied, listed for sublease or available at a future date, and includes only existing, under-construction and under-renovation buildings — sits at a 15-year high.

Of that total available space, 400,000 square feet of it is sublet space, 2.6% of downtown’s total inventory. The San Diego Union-Tribune is offering 45,000 square feet of its 60,000-square-foot presence at 600 B St. for sublease after beginning a 15-year term for the office space in 2016.

During the past four quarters, a total of less than 250,000 square feet has been leased in downtown, which is a far cry from historical leasing volume. That total is roughly equivalent to the average quarterly leasing volume since the start of 2016.

It’s amid this challenging environment that rents have fallen harder downtown than anywhere else in San Diego over the past year, declining by 2.3% year over year. For comparison, even in areas such as University Town Center and Sorrento Mesa, where the vacancy rates have risen amid the pandemic, rents still grew 1.2% and 1.7%, respectively, over the past 12 months. Rents have already fallen 0.5% during the first four months of 2021 and are projected to fall even further as the region begins recovering from the pandemic.

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