Article by Greg Kipnis, Associate, San Diego
In the San Diego office market, product boasting on-site amenities continues to attract tenants and incur less down time when compared with office projects with minimal amenities. Gyms, locker rooms, recreational areas, and cafes are becoming the standard. Office users are looking for these amenities and landlords are feeling the pressure to keep pace with the desires of the millennial generation.
With the demand in the market, landlords are continuing to see a rise in TI costs. Building to code and in compliance with Title 24, plus the cumbersome permitting process all contribute to the increased cost of tenant improvements. TI costs are now between $25-$40 per square foot for second generation space and $65-$75 per square foot for shell space. These high costs for improvements, combined with low vacancy, are compelling landlords to heavily scrutinize tenant financials.
Overall, the office market remains on a slow but steady course. Vacancy rates countywide are currently hovering right around 10-11%. There is heavy activity among users under 5,000 square feet while larger occupiers are being forced to consider multiple markets due to the limited supply of buildings over 100,000 square feet.
San Diego’s unemployment continues to be among the nation’s lowest as it continues to dip towards 3.5%, compared with California’s unemployment which continues to be at 4.2%. This spring the San Diego Economic Development Council reported 133,445 unique job postings. The largest number of job postings were with Lyft Inc., Scripps Health, and UCSD.
We are seeing San Diego’s tech and life science community continue to build momentum as these industries have been the quickest developing sector, growing at an annual rate of approximately 9% since 2011. Some highlights from the second quarter include:
• $79 million in venture capital put into San Diego start-ups this past quarter.
• 5,700 different requirements for registered nurses (the most demanded job) this quarter.
• Approximately $1.7 billion in foreign investment in life science companies based in San Diego over spring.
One of the most notable office sales that took place was the purchase of Scripps Wateridge Corporate Center for $209.97 per square foot by HCP Life Science REIT, Inc. from Colony Northstar, Inc. out of Boston. HCP plans to convert the two class B office buildings consisting of approximately 125,000 square feet to Class A lab space. A strong disconnect currently exists between buyers and sellers of office product, and a number of assets have been pulled from the market as seller expectations are not met.
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