Copyright San Diego Union-Tribune
Developers are taking an extended break from a slumping San Diego area office market beset by empty space, depressed demand and high construction costs. No office projects are currently under construction countywide, according to a new report from commercial real estate services firm CBRE. The report, released last month, looked at office leasing and building activity in the San Diego market in the third quarter, from July through September. The no-office-construction phenomenon, which is atypical, has been playing out for some time, as new construction in the office sector paused after the mid-2024 completion of the mixed-use West project in downtown San Diego, according to the report. “It’s the first time in over 10 years that we haven’t had anything currently under construction,” Zach DiSalvo, an associate research director at CBRE, told the Union-Tribune. “Typically there’s around 500,000 square feet under construction … and this is the first time in a while where we haven’t had anything currently being worked on and slated to deliver. And there’s really nothing even scheduled to break ground in the coming year or two.” CBRE classifies office and lab space differently, although life science construction has also dramatically tapered off in recent years, he said. The absence of office construction activity is in stark contrast to prior years, as noted by DiSalvo. Between 2022 to 2024, an average of 642,698 square feet was under construction across the county on a quarterly basis, including a peak of more than 1 million square feet of space from April to June in 2023, the report said. “There’s not a lot of demand in the market right now. It’s been fairly muted compared to what we saw in 2021 and 2022,” DiSalvo said. “The other part of it is just the cost of construction is really high right now.” Demand for space, he said, spiked in prior years as big technology companies — Apple, Amazon, Meta and Alphabet — established outposts in the market. The trend was punctuated by Apple’s July 2022 purchase of the 67.6-acre Rancho Vista Corporate Center in Rancho Bernardo, the long-time home of Hewlett Packard. But the tech wave has since subsided. And speculative development, or building based on the assumption of future demand, isn’t a gamble developers are willing to make right now, DiSalvo said. That’s due, in part, to office landlords struggling to fill their best-in-class projects. For instance, Kilroy’s 2100 Kettner building in Little Italy, completed in 2021, is just 50% leased, according to a recent regulatory filing from the publicly traded real estate investment trust. There’s also IQHQ’s Research and Development District on San Diego Bay. The project’s 1.5 million square feet of space, classified as a mix of office and lab space, is mostly empty. “A lot of these developers don’t want to go spec on a building (when they don’t) have a tenant in tow who’s going to start paying rent on it immediately,” DiSalvo said. The overall office vacancy rate of the San Diego area market climbed to nearly 15% in the third quarter, which is the highest vacancy rate recorded since the end of 2012, according to the CBRE report. The region, as defined by CBRE, encompasses 75.4 million square feet of office space and extends to southwest Riverside. The regional availability rate, which includes space marketed for lease or sublease, is 19%. The downtown San Diego submarket is fairing the worst with 27.5% of 11.6 million square feet of office space vacant — and 31.2% available for rent — at the end of September. “The lack of new construction is a good thing as far as our vacancy rate is concerned,” DiSalvo said, adding that the region is faring better than other West Coast markets. “San Diego has been unique in that we’re one of a few markets where our office inventory has shrunk over the last five or so years.” There were 245 leases, representing 1.2 million square feet of office space, executed in the third quarter, with the leased square footage 13.4% higher than the previous quarter but 6.7% down from the year-ago quarter, according to CBRE. Alliant Insurance signed the largest new office lease in the quarter, taking 52,196 square feet of space at Ampersand in Mission Valley.
