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Overall Office Rents Have Yet To Fall in San Diego's Urban Areas

Downtown San Diego Continues to Feel the Impact of Slow Remand, Record Available Space

By Joshua Ohl CoStar Analytics June 8, 2021 | 1:30 P.M.

Leasing activity in the San Diego office market has only begun to climb out its slumber, with more than 1 million square feet of new leases signed during this year’s first and second quarters so far. Still, leasing activity is roughly 25% below the average quarterly leasing volume compared with the years before the pandemic.

Given the downshift in office demand since the beginning of the pandemic, it was only a matter of time before rent growth was impacted.

Annual rent growth ended the first quarter a hair below 0%, falling at 0.1%. That was the first time since the end of 2011 that year-over-year rent growth declined. Year to date, rent growth is flat at 0%, while year over year, rents are now down 0.4%.

When looking at the region's suburban, urban and central business district, or downtown, locations, rent growth by location type hasn’t been uniform.

The central business district has performed the worst over the past year, with rents dropping by 1.9%. Downtown is inundated with available space; a full 31.5% of office space in the area is available, or 4.8 million square feet. That total includes all space that is direct, sublet, under renovation or under construction. It is also the most available space in the downtown areas in 15 years. The vacancy rate, 20.7%, nearly matches the 15-year peak of 20.8% that was recorded during the third quarter of 2020.

Rents in urban locations have performed the best over the past year, which is to say that they haven’t fallen. But they haven’t grown either. Rent growth in this set is 0% year over year. Urban areas include some of San Diego’s primary office nodes, from University Town Center to Sorrento Mesa, where rents have grown 0.6% and 0.9%, respectively, and Mission Valley, where rents have fallen 0.9%.

Three-star inventory is driving rent growth in University Town Center, with rents up 2.4% year over year in that segment. The same is true in Sorrento Mesa, where rents have grown 2.1% in mid-tier inventory over the past 12 months.

Rents in suburban locations, including Carlsbad, Chula Vista, Rancho Bernardo and Del Mar Heights have fallen 0.3% year over year, on average.

The weight of sublet space will also continue to hover over the region, impacting landlord’s ability to raise rents when competitive space is available at a considerable discount, even without additional tenant improvement allowances.

The current delta between asking rents for direct space versus sublet space is 40 cents per square foot in downtown areas. In urban locations, that difference is 24 cents per square foot, although asking rents are 54 and 56 cents per square foot higher in Sorrento Mesa and University Town Center, respectively, than sublet asking rents in those two submarkets. In suburban areas, the delta is much less severe, at only 9 cents per square foot. Relative to the total amount of inventory, these suburban areas contain the least amount of available sublet space.

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