From the Desk of Eric Northbrook
Property values are driven by a variety of factors that are in a constant state of change, and the fluctuation in lease rates and sales prices don’t always run along the same track. While macro-economic conditions like GDP growth and regional job creation have their impact on the value equation, lease rates and sales prices for all product types are largely driven by conditions in the immediate area of the property being evaluated, Thus, a successful strategic facilities plan for your business should be based on a sound understanding and detailed analysis of local market conditions.
National and regional economic trends are also important because they tend to shape the long-term outlook of the business community at large. As business owners gain confidence, they are more likely to take on the risk of expanding their operations to accommodate anticipated growth. This leads to the creation of new jobs and the need for more space from emerging business sectors. E-commerce, which rapidly expanded countywide during the pandemic began, is a good example. As demand picks up, vacancy falls and the cost of the remaining supply rises. If not enough inventory is added to the market, critical shortages can occur and prices can rise dramatically, as they have in today’s industrial property sector.
However, market activity is not distributed evenly across all product types and submarkets. High growth industries can push demand higher in specific areas, as larger companies snap up large blocks of space even before the need for that space is fully realized. Those commitments create business sector hubs that ignite further growth from start-up operations. The explosive growth in the life science industry along the Central San Diego coast is a prime example. Property values and lease rates have soared to new heights as life science users of all sizes have flocked to the area around UCSD which is now almost 100% built out. Life science users have migrated into Sorrento Valley/Mesa and downtown San Diego is pioneering to attract and retain the talented employees that are so crucial to their success. As a result, they are willing to pay a significant premium for the right location. Landlords have responded by investing in the major retrofitting of their properties to accommodate life science users, and developers are buying up traditional office buildings to retrofit for life science users.
The same cannot be said for the general office market in the same area. The first pandemic lockdown in 2020 hit the office market hard and two years later barely a third of office workers are back at their desks on a full-time basis. Employers found a way to leverage communication technologies to maintain productivity with a remote workforce and it has worked better than expected. This has many traditional office users taking a serious look at reducing their space footprint and moving forward with a hybrid work model that incorporates a work-from-home component. That has resulted in a slowdown in space absorption and lease rate growth, which, in turn, has created opportunities for tenants looking for space to negotiate more favorable terms.
While every submarket has its own characteristics, so does each individual property. It is vital that the unique circumstances of each property and its owner be considered to properly evaluate a leasing opportunity. For example, the current and projected vacancy for every property is different. A property with high occupancy today may have several leases expiring in the short term that could drive vacancy high enough to motivate the owner to aggressively pursue new tenants by offering using attractive lease rates, generous tenant improvement allowances, and other concessions like free rent and discounted parking fees. Conversely, an owner whose building is nearly full with low expected turnover might be less forthcoming and more particular.
The bottom line is this: finding the right building for your needs requires keen attention to detail and a thorough understanding of all your options before you make such an important decision. At Voit-San Diego, all of our professionals are product and area specialists. They understand the unique circumstances surrounding every potential location for your company and will use their knowledge and experience to match your company to the space that will work best for you both operationally and financially.
Give me a call and I will make sure you are in good hands. I look forward to hearing from you.
