San Diego’s office market has remained relatively stagnant for the past several quarters. However, a third quarter market report from Cushman & Wakefield suggests that the growing life science sector will aid the market moving forward as it has already accounted for a majority of the leasing activity taking place over the third quarter.
According to the report, San Diego’s office vacancy rate finished the quarter at 13.9 percent, a decrease of 10 basis points from the previous quarter, but 60 basis points up from the third quarter of 2020. Despite the high vacancy rate, San Diego office tenants absorbed 264,601 square feet, marking the third consecutive quarter of occupancy gains since the beginning of the COVID-19 pandemic. At the same time, asking rent remained unchanged from the previous quarter at $3.43 per square foot.
However, rental rates for Class A office buildings increased by five percent to $3.96 per square foot, while the Class B rental rates decreased by 6.6 percent to $3.11 per square foot. Cushman & Wakefield suggests this is likely due to employers seeking out buildings with high-quality amenity spaces. However, the report also suggests that rental rates for all class types are likely to increase as developers acquire older buildings for the conversion to life science space.
“Most of the expected future absorption from previously signed leases will come from the life sciences sector, including tenants like Shoreline Biosciences, Biolinq and TriLink Biotechnologies. Though activity from traditional office tenants has largely been limited to renewals, Apple has nearly 350,000 sf of leases that are expected to occupy over the next 12 months across existing and under construction projects, with further plans for a major San Diego campus,” the report states.
During the third quarter, prime life science submarkets, including Sorrento Mesa, Del Mar Heights and Torrey Pines, saw the most positive net absorption. The three markets saw positive net absorption of 134,700 square feet, 105,008 square feet and 92,900 square feet, respectively, due to the large number of life science tenants. For instance, a majority of space absorbed in Sorrento Mesa was by Altos Labs, Quantum-Si and ViaCyte, which all took up space at Genesis Morehouse.
Overall, leasing activity in the third quarter totaled 1.6 million square feet across 95 deals, compared to 1.3 million square feet in the second quarter of the year. The largest lease signed during the third quarter was Tandem Diabetes 182,000 square-foot lease at Del Mar Corporate Centre. Also in the third quarter, DermTech signed a lease for 96,000 square feet at the same campus. Sorrento Therapeutics also signed a 163,000 square-foot lease at a build-to-suit project in Sorrento Mesa, while extending four leases at other projects with the same landlord. Additionally, Apple leased 140,000 square feet at La Jolla Reserve in San Diego’s University Towne Center.
As activity among the life science sector continues to grow, developers continue to push out more product; though space is limited. Currently, 19 office properties totaling 3.3 million square feet are under construction in all of San Diego County, and 31.3 percent is pre-leased. Approximately 695,000 square feet, or ten buildings, are expected to be delivered by the end of 2021.
Due to lack of space, life science developers also continue to acquire office buildings for the sake of life science conversions. During the third quarter, Alexandria Real Estate acquired Make and Commerce, a 302,727 square-foot creative office campus in Carlsbad, for $135 million. In Del Mar Heights, Phase 3 Real Estate also purchased the 74,620 square-foot Champs Plaza for $34.8 million.
“These notable transactions coupled with diminishing supply in the core life sciences submarkets are causing life sciences tenants to expand to new frontiers. Current demand will outpace new supply coming online in the next 24 months in the mid-cities, forcing life sciences users to expand their search parameters and continue this trend,” the report stated.
Cushman & Wakefield anticipates activity will continue to remain high among the area’s life science tenants. Leasing within the 10,000 to 50,000 square-foot range will likely be the primary focus of tenants in the region as employers reassess their needs for space. Leasing is also likely to remain relatively high for high-quality amenity buildings as employers continue to draw employees back to the office.
“Expanding COVID-19 vaccine eligibility in California and throughout the country will result in increased activity through the year; however, tenants are reassessing their real estate footprint based on work-from-home policies as well as assessing both short and long-term needs working through and after the pandemic,” Cushman & Wakefield states in the report.
