Report: Sublet Space in San Diego’s Office Market at All-Time High

San Diego, Blackstone Group, TrueAmerica Multifamily, Conrad Prebys Foundation, Marcus & Millichap

By Catherine Sweeney

In the first quarter of 2021, sublet space in San Diego’s office market climbed to the highest rate in over 15 years, according to a recent report by Kidder Mathews. The report shows that over the past 12 months, sublet availability has increased by 44 percent, with approximately 2.4 million square feet of space currently available. 

Jeff Gilbert, vice president of Kidder Mathews’ San Diego office division, said this is largely due to the many employees continuing to work from home, and that this increase will likely begin to slow down as the COVID-19 vaccine continues to roll out across San Diego. 

There’s been a huge spike of it because of COVID last year,” Gilbert said. “We are in a whole new market place right now and there are efficiencies tenants are finding with their building footprints and their employees.”

In the first quarter, sublet availability across San Diego’s submarkets remained as low as 0.1 percent in East County, and as high as 3.2 percent in the North Cities. Downtown, sublet availability was at 2.9 percent. 

Vacancy rates also remained high, according to the report. In the first quarter, vacancy rates in San Diego’s office market reached 12.8 percent. The highest vacancy rates were seen downtown at 20.5 percent. At the same time last year, vacancy rates across San Diego were at 10..8 percent. 

Despite the increase in sublet availability and high vacancy rates, rental rates remained at the highest they have ever been. While at an all-time high, the report also notes that the rates remained relatively steady due to many landlords keeping rates the same in anticipation of employees returning to the office. Others, however, are giving into pressure and lowering rates due to increasing sublet availability. 

Overall, rental rates in the San Diego office market have increased to $2.94 per square foot. The highest rates were represented in North Cities at $3.55 per square foot, and the lowest in South County at $2.14 per square foot. Downtown, rental rates averaged $2.88 per square foot. 

“The report talks about how rental rates have stayed pretty steady through COVID, and in your downtown areas, particularly downtown San Diego, there has been a decrease in asking rental rates, but if you look at the county as a whole, it’s been really steady,” Gilbert said. 

In fact, Gilbert said some companies continued to thrive despite the challenges presented by the COVID-19 pandemic, particularly tech and biotech firms. 

The report showed those leading the way in leasing activity were tech companies, including Apple and Google, which were behind some of the larger lease transactions taking place in the first quarter. Apple leased 130,649 square feet at the Rancho Vista Corporate Center in Rancho Bernardo. Google also leased 63,000 square feet of space at The Verge in Sorrento Mesa. 

“You also have Biotech, which is huge in San Diego,” Gilbert said. “We’re the second or third largest in the country for biotech. It’s another driver for sure in tenant activity, and actually, they did really well during COVID.”

Some of these biotech companies include Element Biosciences, Inc., which leased 36,998 square feet at Alexandria Tech Center in Sorrento Mesa, as well as Millenium Health, which leased 34,661 in Rancho Bernardo.  

Additionally, Gilbert said there is expected to be approximately 1 million square feet delivered by 2022, with some construction currently underway in the first quarter. 

Downtown, Kilroy Realty Corporation delivered 234,000 square feet this month at 2100 Kettner Boulevard. Stockdale Capital Partners also is expected to complete its 750,000-square-foot downtown office project, at 324 Horton Plaza, by 2022. 

As more San Diego residents receive their vaccines, Gilbert said he anticipates similar activity will pick up in other industries as well. 

“I don’t foresee a huge increase in sublease space on the market. If anything, it’s probably going to diminish,” he said. “You will have tenants that, after leases roll, will be downsizing, because they can and they figured out they can partially work from home and they won’t need as much square footage as they did before. I think a lot of that space on the market for subleasing will start to diminish as the economy recovers.”