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April 14, 2017

Commercial Real Estate 2017: The Office Winners So Far

San Diego Business Journal

Lou Hirsh

The stats gauging San Diego County's commercial real estate performance in 2017's first quarter are now arriving from local brokerage firms. Based on property leasing, sales and other trends, these are among the key winners emerging in the office category:

Downtown Landlords - Big swaths of vacant space were leased up in the downtown market, fueling a continued drop in vacancy (12.1 percent, below the countywide 12.7 percent, according to JLL) and a rise in average asking rents ($2.59 per square foot, not far from the countywide $2.63). Downtown led all other local markets for first-quarter positive space absorption, thanks largely to the city of San Diego leasing out the entire 315,000-square-foot tower that formerly housed Sempra Energy (now owned by Cisterra Development) for government offices.

Class B Property Owners - Owners of older Class B properties continue to capitalize on growing space demand, in a county where the newest Class A locations in high-demand areas are basically filled up and new construction remains limited. Neighborhoods that are benefitting include Kearny Mesa, Mission Valley, Carlsbad and Oceanside, along with downtown San Diego.

Colliers International Group Inc. noted that some of the biggest leasings of the quarter were by firms taking new space in Class B buildings, including IT security firm Proficio (more than 24,000 square feet in Carlsbad), accounting firm Considine & Considine (20,000 square feet in Mission Valley), and accounting firm Levit Zacks (14,000 square feet downtown). Also, educational organization AVID purchased an entire Aero Drive building in Kearny Mesa for $30.1 million and occupied two-thirds of its space during the quarter - more than 62,000 square feet.

Smaller Tenants - The burgeoning of coworking spaces is providing a multitude of potential low-cost rental alternatives to those companies needing 1,500 square feet or less, especially in places such as downtown San Diego. Colliers reported that downtown San Diego alone had more than 140,000 square feet of coworking space in place at the end of 2016, from multiple providers.

Conversely, brokerage firm Kidder Mathews notes that larger office tenants, needing blocks of 40,000 square feet or more, remain hard-pressed to find it so far in 2017. There are currently only nine such blocks available countywide, with eight others proposed. That likely means Fortune 500 companies and other big players looking to expand locally will pay a premium, though demand could drive more speculative office development in the next few years.

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