Report: San Diego Office Market’s Robust Activity During Second Quarter Bodes Well for Region

San Diego, Cushman & Wakefield, Sorrenta Mesa, Biolabs, Genalyte, Apple, PetDx, Dermtech, Bristol Myers Squibb, Campus Point, One Alexandria, Breakthrough Properties
Courtesy of Clayton Cardinalli

By Jack Stubbs

Earlier this year represented a busy time during the second quarter of 2022, with strong market fundamentals and various data points indicating positive times ahead for the market.

According to Cushman & Wakefield’s “Q2 San Diego Office Market Report,” the office market hit over 1 million square feet of positive net absorption in the second quarter, which marked the sixth consecutive quarter of occupancy gains since the start of the COVID-19 pandemic. The report – which covers numerous office market trends including an economic overview, supply and demand, tenant trends, pricing, inventory and a future outlook – indicated a strong market, which is forecasted to remain so in the coming quarters.

The economic overview for the San Diego office market reflects a strong economy. Between May 2021 and May 2022, the monthly unemployment rate decreased from 6.6 percent last year to 2.7 percent this year, and is currently 100 basis points below the quarterly average of 3.7 percent, states the report. 

Looking ahead through 2022, all employment sectors are anticipated to grow at a combined rate of 5.4 percent (representing the addition of around 77,340 jobs. The annual unemployment rate is forecasted to decrease from 6.6 percent in 2021 to 3.8 percent in 2022 and just over three percent in 2023.

In terms of supply and demand trends, the data points observed in the report follow similar positive patterns in terms of the anticipated trajectory of San Diego’s office market. At the end of the second quarter, San Diego’s direct office vacancy was 12.3 percent, marking a decrease of 80 basis points from the previous quarter. Tenants absorbed one million square feet during the quarter, with all asset classes experiencing positive absorption (Class A buildings absorbed the most space, with the addition of 629,000 square feet, followed by Class B buildings with over 328,400 square feet. 

Of San Diego’s submarkets, Sorrento Mesa recorded the most positive absorption – more than 238,800 square feet – largely due to the delivery of a build-to-suit (BTS) for Element Biosciences and the occupancy of several other life sciences tenants, notes the report. The Eastgate submarket saw positive absorption of more than 204,000 square feet, due entirely to the delivery of a building for tech giant apple. 

Along similar lines, leasing activity demonstrated robust demand from tenants in the second quarter. There were 1.2 million square feet of leases – across 103 deals – which compares relatively favorable to the 2.3 million square feet leased in the first quarter of 2022 and 1.2 million square feet leased in the second quarter of 2021, states the report.

The life sciences sector continues to play a significant role in precipitating demand for space in the commercial office market. Companies like Biolabs and Genalyte in Sorrento Mesa, along with Apple’s continued expansion in the I-15 Corridor and various mid-sized tenants across North County contributed heavily to demand. San Diego-based Phase 3 Real Estate’s conversion of the former Thomas Jefferson School of Law building signed their first tenant in the second quarter: Native Microbials plan to take a full floor at the project.

Looking ahead, most of the expected future absorption from previously signed leases will come from tenants in the life sciences sector, including names like PetDx, Dermtech and Biolabs, states the report.

As with the positive trends and transactions that occurred during the second quarter, the future outlook looks bright for the San Diego office market, especially in terms of inventory for the coming months. There are 30 properties totaling nearly 4.9 million square feet currently under construction across the county: 29 percent are pre-leased and 158,600 square feet (across two buildings) are expected to be delivered by the end of this year.

There are 84 proposed projects totaling 24.6 million square feet across all asset classes in the construction pipeline; many of these are life sciences projects expected to break ground in the coming year. Some of these include built-to-suit projects for various tenants at One Alexandria Square in Torrey Pines and another built-to-suite project for Bristol Myers Squibb in Campus Point.

In terms of the future trajectory of San Diego’s office market, conversions of office projects into the life sciences space reflect an increasing interest in the sector. Some of the notable conversions include Breakthrough Properties’ acquisitions of Governor Pointe in Governor and the industrial multi-tenant project Environmental Plaza in Sorrento Valley.