By Joshua Ohl
CoStar Analytics
August 13, 2024
Asking Rents Were the Same Level in Mid-2024 as They Were in Mid-2017
Downtown San Diego, California's office vacancy rate is approaching 30%, which is the highest level recorded by CoStar in more than 20 years. It has edged higher by almost three percentage points in the past year.
Office leasing volume during the first half of the year downtown equaled a typical pre-pandemic quarter between 2015 and 2019 when the central business district averaged more than 250,000 square feet in volume.
Only two quarters in the past two years saw positive net absorption, which tracks the change in occupancy over time. Since the beginning of 2020, occupancy has fallen by nearly 1 million square feet, increasing vacancy by more than 12 percentage points in the process. For context, during the Great Recession, the vacancy rate increased by roughly five percentage points before stabilizing.
Amid this environment, downtown has entered its most significant supply wave in 20 years, which commenced with the delivery of West, a mixed-use project with 290,000 square feet of office space below 431 luxury apartments. When it opened in mid-2024, the property was roughly 40% pre-leased, with San Diego Association of Governments having pre-leased nearly 90,000 square feet.
The other developments, RaDD and Campus at Horton, are nearing completion and total 2.4 million square feet. No office leases have been announced, and barring last-minute pre-leasing, it will be difficult for downtown to avoid vacancy climbing above 35%. Local market participants have suggested that vacancy is already that high, due to the amount of space that is not occupied or available for lease. Full floors with the lights turned off are a common sight.
That’s one of the primary reasons that downtown has not been overly burdened by the sublease market. Few firms have been adding their underutilized space to the sublease market due to limited demand. Nearly every other primary office area of San Diego, from Carlsbad to University Town Center, has more available sublet space.
Given the high vacancy and availability rates, tenants have leverage. Market asking rents were the same level in mid-2024 as they were in mid-2017. Rents have fallen year over year and by more than 5% in the past five, and that trend is unlikely to reverse course in the coming quarters. No other area of the San Diego region offers the level of concessions that are employed here to secure long-term leases.
Although market participants hope that downtown’s long-term prospects will improve, particularly with the vibrant cultural amenities and sprawling multifamily properties filled with younger renters, it is likely to be a challenging stretch for area landlords. Shifting the narrative could prove difficult, especially against a backdrop of homelessness and illicit activity that has been responsible for pushing office tenants out of downtown in recent years.
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