Office Rents Are Back on the Rise in San Diego
September 8, 2021
Interior Cities, Lower-Cost Areas Are Outperforming the Region
Annual rent growth across the San Diego office market is above 1% for the first time in a year, and rent growth in almost every one of San Diego's markets is back in the black, with the exception of downtown San Diego, where rents posted a modest year-over-year decline of 0.1%. This is compared to earlier in 2021, when asking office rents were falling nearly 2% there on an annualized basis.
Downtown San Diego is still burdened by a heavily speculative pipeline of office construction activity, a vacancy rate north of 23% and an availability rate of 30%, which are easily the highest levels of San Diego’s primary office markets.
Even as demand is only now returning to the freeway corridors along Interstate 5 and I-15, landlords are beginning to raise rents again. This is where tech companies and life science firms have established roots and will likely always be a draw for tenants. Market rents in Sorrento Mesa, University Town Center and Torrey Pines, in particular, have outperformed the region during the pandemic, and rents have risen between 1.6% and 2% there in the past 12 months.
Average market rents in San Diego’s primary office hubs along the freeway corridors are $3.35 per square foot gross on a monthly basis, coming in at $.40 per square foot above the San Diego average. Rents have grown an average of 1.1% year over year in these areas.
Conversely, market rent growth in many of San Diego’s interior cities including Vista and Chula Vista have remained afloat during the pandemic and have largely outperformed San Diego’s primary office nodes. The average market rent in San Diego's top-performing markets on a year-over-year basis is under $2.60 per square foot per month gross, or nearly $.40 per square foot less than the regional average. Rents have grown an average of 3% annually.
The amount of sublet space has also fallen by 400,000 square feet relative to the peak of 2.4 million square feet at the end of 2020. As the amount of office sublet space has fallen, the difference between asking rents for direct and sublet space has narrowed to 7%. That’s likely welcome news for landlords who are pitting direct space against sublet listings at their properties.
The overall office vacancy rate in San Diego has fallen below 12% and the occupancy losses that spread across the region following the coronavirus outbreak have tapered off. But school closures due to quarantines could add a layer of complexity to the office recovery if parents need to remain at home, making it less likely to be a linear one even as the market is showing signs of turning the corner.