The Times They Are A Changing
How has the pandemic affected the commercial real estate industry in the past year?
March 18, 2021
James Bengala & Selina Sounakhene
It’s been a full year since last year’s article titled “What Was and What Is Yet to Come,” and we have experienced some truly amazing happenings in the last 12 months. Last April, COVID-19 had just reared its ugly head and so much was unknown about the virus. Now in March of 2021, we have grown accustomed to stay-at-home ordinances and the shutdown of every business that is not considered to be essential. The continued extensions of work from home orders led tech giants Facebook and Twitter to allow employees to work from home indefinitely. At the writing of this article, there have been over 120 million cases of the virus and over 2.6 million deaths worldwide. There is a light at the end of the tunnel – more than 107 million Americans or 21% of the population have received their first dose, with the Biden administration predicting that there will be enough doses available for every adult by May.
This has all had an impact on the industry. The forced shuttering of retailers who weren’t considered essential businesses has obliterated that sector of the commercial real estate industry. Pre-COVID-19, malls were already suffering, so much so that after over a century in business, department store JCPenney filed for bankruptcy. Unable to open their doors to provide service, retailers GNC, Guitar Center and 24 Hour Fitness followed suit. Not every sector in commercial real estate has suffered from the pandemic, while retail and multifamily landlords are struggling to collect rents, the industrial market has been booming. As people stayed home, E-commerce companies took off. The shift from purchasing in person to an online purchase and delivery model has seen Amazon explode in the last year. As Amazon expanded their services to include groceries through a partnership with Whole Foods, as well as pharmaceuticals, via joining forces with PillPack, they also grew their commercial footprint. Their construction of an over 3 million square foot building in Otay Mesa will be one of the largest buildings ever constructed in San Diego County.
While the industrial market has held strong, another sector suffering is the office market. In North County San Diego, vacancy rates are on the rise and leasing activity has sharply declined, direct leasing square footage is down nearly 65% compared to 2020. While direct leases have declined, subleasing activity is on the rise, with an increase of 65% subleased square footage. We are also seeing an increase in office space availability, up nearly 3%. Leasing activity in San Diego is the lowest that it’s been in over 20 years, the average lease size during the pandemic was 2,650 square feet, down 27% from the average the year before. Some notable companies who have put their space on the market for sublease include Illumina, The San Diego Tribune, and Arris Group with sublease space totaling over 210,000 square feet. San Diego’s historically high vacancy rate is higher than both the state of California and the United States national average. All of this has led to decreases in rental rates which we believe we will continue to see as the effects of the pandemic play out.
Though office leasing has taken a hit, office building sales transactions in North County San Diego have held steady. Sales volume has risen steadily with Q4 2020 seeing a whopping $44 million in transactions. Some notable sales include 2160 S El Camino Real in Oceanside that sold in August for $6.65 million at $492/SF and 520 N Coast Highway that sold for $1.9 million at $422/SF.
Though leasing activity is down from pre-pandemic times, with a sharp decline in Q2 and Q3 2020, activity started to pick up in Q4 2020 and has continued to increase in 2021. There is still hope for San Diego, who has established itself as the third largest bio-tech city in the country. As the Horton plaza redevelopment and Manchester Pacific Gateway site continues construction, tech companies will be persuaded to move into these new campuses. San Diego already hosts Google, meanwhile Apple recently leased over 200,000 square feet of office. New sprouts are starting to present themselves for lease transactions for the rest of the year. Not every company is downsizing though. Our Lee family has continued to grow, and we have outgrown our office, needing nearly 30% more space than what we currently have. Now is the time for those looking, with over 2.6 million square feet on the market and decreasing rental rates, you’re going to end up with the office of your dreams.