Real Estate Market Review

San Diego Office

4th Quarter

2017

A diverse employment base combined with a well-educated workforce and tepid development have set the San Diego office market on firm footing. The submarkets encompassing the Golden Triangle are among the county’s central tech and life science hubs, with Downtown trying to establish itself as the home for the next wave of start-ups. San Diego doubled its year-over-year absorption in 2016 (hitting 1.4 million SF of annual net absorption), although 2017 fell short of that mark. Tightening vacancies, limited sublet space, a lack of wide-scale development, and steady rent growth have contributed to the confidence of investors who continue to find a market with average yields more favorable than in the apartment sector. Downtown was a favorite target of institutional capital in 2017 with a number of big properties trading hands.

4th Quarter 2017 | 1

The San Diego Office market continued to show signs of tightening at the close of 2017, with vacancy rates dropping to a post-recession record low and rental rates reaching all-time highs. The total vacancy rate in the overall San Diego market fell to 10.3%, a decrease from last year’s rate of 10.9%, which was the previous record post-recession low, continuing the downward trend in vacancy. Overall employment growth remains positive, as the San Diego County unemployment rate sits at 3.3%, below the year-ago estimate of 4.3% and well below the unadjusted unemployment rate of 4.0% for California and 3.9% for the nation. According to the State of California’s Employment Development Department, San Diego County’s total nonfarm employment increased by 20,800 jobs year over year between November 2016 and November 2017.

Net absorption for Class A space at the end of 2017 was approximately 77,545 s.f., in spite of over 2.4 million s.f. of leasing activity. Class B office space total vacancy dipped to 10.6%, down 180 basis points from the same time last year, a notable decrease from when vacancy posted at 12.4%. Office lease rates for Class A average $3.19/s.f. on a full service basis across the San Diego market, an uptick from last year’s $3.13. Users seeking Class A space pay a $0.74/s.f. premium over Class B space, on average, and Class B leasing activity is the strongest at 3.38 million s.f.

Submarkets in San Diego with the highest vacancy rates include Carlsbad at 20.3% and Vista at 17%. Total space available in the market grew to 14.4 million s.f., increasing total availability to 14.2% which is 50 basis

Market Forecast TrendsRenovate America 16409 W Bernardo Drive, Rancho Bernardo 161,000 s.f. leased

Takeda Pharmaceuticals 9625 Towne Centre Drive, UTC 150,000 s.f. leased

UCSD 9305 Lightwave Avenue, Kearny Mesa 82,000 s.f. leased

Vistage 4840 Eastgate Mall, UTC 61,000 s.f. leased

Le Lycee Francais Et International de San Diego 8401 Aero Drive, Kearny Mesa 60,480 s.f. leased

Notable Lease Transactions

ABSORPTION VACANCY

RENTAL RATE

CONSTRUCTION DELIVERIES

2 | San Diego Office Real Estate Market Review

points above the year ago rate of 13.7%. Submarkets with the highest direct net absorption in 2017 included Downtown at 297,000 s.f. and Kearny Mesa at 271,000 s.f.

Tenants remain focused on value, looking for real estate opportunities to increase employee engagement, provide access to amenities, and positively impact employee recruitment. This has led to the growing trend of renovating older buildings and building out creative office upgrades. While the trend toward creative office space is in full swing, leasing hasn’t

caught up yet. The vacancy rate sits near 20% in this cohort, more than twice the metro rate, and one reason could be cost, because these spaces rent for $0.25/s.f. more than typical San Diego office space. Another reason could be location, since the most sizable additions in this inventory are located north of Downtown. Overall, office fundamentals are solid. With its prime location on California’s southern coast, its geographic constraints, and steady demand, vacancies here are holding steady as we head into 2018.

Data Source: CoStar

SubmarketTotal

Inventory

Direct Vacancy

Rate

Sublet Vacancy

Rate

Total Vacancy

Rate

Total Available

Rate

Q4 Direct Net Absorption

YTD Direct Net Absorption

Q4 Leasing Activity

YTD Leasing Activity

Avg Direct Rental

Rate (FS)

Carlsbad 6,334,168 19.3% 1.0% 20.3% 25.6% (90,201) 27,519 178,573 572,969 $2.45

Escondido 1,630,112 9.3% 0.0% 9.3% 16.4% 10,861 (18,357) 21,906 107,162 $2.00

Oceanside 1,349,948 10.5% 0.4% 10.9% 13.8% (17,557) 38,735 11,070 91,405 $1.96

San Marcos 1,375,278 10.9% 0.0% 10.9% 12.5% (25,305) 18,054 3,753 34,105 $2.28

Vista 1,231,884 17.0% 0.0% 17.0% 17.6% 20,691 (5,656) 5,236 111,987 $1.83

North County 11,921,390 15.7% 0.6% 16.3% 20.7% (101,511) 60,295 220,538 917,628 $2.25

Poway 1,324,065 5.4% 0.0% 5.4% 10.9% 16,395 (11,221) 23,424 54,572 $2.13

Rancho Bernardo 6,974,441 10.1% 2.0% 12.1% 15.7% (92,917) (307,182) 114,753 338,234 $2.86

Scripps Ranch 2,705,218 13.5% 0.2% 13.7% 17.2% 60,820 (154,004) 25,681 236,961 $2.34

I-15 Corridor 11,003,724 10.4% 1.3% 11.7% 15.5% (15,702) (472,407) 163,858 629,767 $2.64

Del Mar Heights/Carmel Valley 4,754,750 14.6% 0.8% 15.4% 23.1% 32,347 62,548 104,516 399,921 $4.13

Governor Park 890,493 7.6% 0.5% 8.1% 12.5% 4,813 (10,575) 11,170 51,138 $2.74

La Jolla 1,374,565 7.3% 0.9% 8.2% 11.0% 4,251 (52,262) 24,001 99,265 $3.23

Miramar 1,610,914 9.8% 0.0% 9.8% 13.0% (11,355) (22,520) 11,604 116,243 $1.81

North Beach Cities 2,332,795 5.6% 0.2% 5.8% 8.2% (18,141) (24,496) 50,419 164,100 $3.44

Sorrento Mesa 9,497,713 12.9% 0.0% 12.9% 15.3% (119,214) (82,321) 42,469 415,436 $2.75

Sorrento Valley 838,908 7.9% 0.0% 7.9% 15.9% (5,388) 9,357 4,564 126,636 $2.15

Torrey Pines 2,511,334 3.1% 1.2% 4.2% 3.9% 8,862 15,853 1,198 36,461 $3.63

UTC 8,590,052 9.7% 2.1% 11.8% 17.3% 98,148 (33,361) 237,571 940,444 $3.39

North Cities 32,401,524 10.4% 0.8% 11.2% 15.2% (5,677) (137,777) 487,512 2,349,644 $3.20

Kearny Mesa 10,622,159 5.7% 0.2% 5.9% 8.9% (244) 271,379 124,112 458,035 $2.17

Mission Gorge 545,432 2.6% 0.0% 2.6% 3.1% 12,537 26,173 5,670 9,400 $1.31

Mission Valley 7,110,204 9.1% 0.7% 9.8% 15.6% (20,331) 93,472 90,425 728,726 $2.35

Old Town/Sports Arena/Pt. Loma 2,120,551 4.1% 0.1% 4.2% 5.9% 36,289 62,340 37,232 114,489 $2.38

PB/Rose Canyon/Morena 1,202,150 3.4% 0.0% 3.4% 4.8% 665 11,079 18,595 61,379 $1.82

Central Suburban 21,600,496 6.5% 0.3% 6.8% 10.4% 28,916 464,443 276,034 1,372,029 $2.21

College Area 1,110,005 4.0% 0.0% 4.0% 4.3% (9,863) 4,661 0 22,488 $2.19

East County 3,604,758 3.2% 0.1% 3.3% 4.3% 22,101 15,824 23,305 95,231 $1.78

East County 4,714,763 3.4% 0.1% 3.5% 4.3% 12,238 20,485 23,305 117,719 $1.88

Park East 155,884 1.0% 3.1% 4.0% 4.0% 0 (1,500) 0 0 $1.95

Uptown East 117,238 0.0% 0.0% 0.0% 0.0% 0 0 0 0 -

Uptown West/Park West 2,549,509 5.9% 0.4% 6.3% 8.3% 13,384 25,198 13,965 101,900 $2.52

Uptown 2,822,631 5.4% 0.6% 5.9% 7.7% 13,384 23,698 13,965 101,900 $2.38

Downtown 12,936,660 10.7% 0.5% 11.1% 17.6% 119,038 297,558 189,568 834,457 $2.56

Chula Vista 2,923,484 8.9% 0.2% 9.1% 10.4% 3,005 31,943 11,081 83,195 $2.54

Coronado 124,831 12.2% 0.0% 12.2% 12.2% 2,138 (3,650) 2,138 2,138 $3.00

National City 508,388 0.8% 0.0% 0.8% 0.8% 42,089 62,876 835 58,071 $2.11

Otay Mesa 231,650 4.9% 0.0% 4.9% 4.9% 4,106 4,229 5,978 12,168 $2.08

San Ysidro/Imperial Beach 86,354 0.0% 0.0% 0.0% 0.0% 0 0 0 0 -

Southeast San Diego 381,826 16.7% 0.0% 16.7% 16.7% 0 (6,300) 0 0 $2.20

South County 4,256,533 8.3% 0.1% 8.4% 9.3% 51,338 89,098 20,032 155,572 $2.31

Class A 35,097,222 10.6% 0.9% 11.5% 16.7% (100,232) 77,545 521,130 2,438,295 $3.25

Class B 51,918,772 10.0% 0.6% 10.6% 14.2% 267,365 315,624 764,935 3,377,607 $2.46

Class C 14,641,727 6.3% 0.1% 6.4% 8.3% (65,109) (47,776) 108,747 662,814 $1.88

San Diego County Total 101,657,721 9.7% 0.6% 10.3% 14.2% 102,024 345,393 1,394,812 6,478,716 $2.68

Area ReviewSubmarket Statistics

4th Quarter 2017 | 3kiddermathews.com

FORECAST

Vacancy

3Q172Q171Q174Q163Q162Q161Q164Q15

Availability

1Q18 3Q182Q184Q1710%

12%

14%

16%

VACANCY VS AVAILABILITY

Average Sales Price (PSF)

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2017

Cap Rate

$0

$100

$200

$300

$400

6%

7%

8%

9%

10%

AVERAGE SALES PRICE & CAPITALIZATION RATES

2Q17 3Q171Q174Q163Q162Q161Q164Q15

Class B

FORECAST

Class A

4Q17 1Q18 3Q182Q18

Total

$2.00

$2.50

$3.00

$3.50

ASKING LEASE RATE

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2017

Vacancy Asking Lease Rate (PSF)

5%

10%

15%

20%

$1.50

$2.00

$2.50

$3.00

VACANCY VS ASKING LEASE RATE

Net Absorption (SF)

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2017

-1.0M

-500K

0

500K

1.0M

1.5M

2.0M

2.5M

3.0M

3.5M

4.0M

NET ABSORPTION - HISTORICAL

Net Absorption (SF)

3Q16 4Q162Q161Q164Q15 1Q17 2Q17 3Q17 4Q17-800K

-700K

-600K

-500K

-400K

-300K

-200K

-100K

0

100K

200K

300K

400K

500K

600K

NET ABSORPTION - QUARTERLY

4 | San Diego Office Real Estate Market Review

Market Breakdown

2017 2016 2015 Annual % Change

Vacancy Rate 10.3% 10.9% 11.5% -5.50%

Availability Rate 14.2% 13.7% 15.1% 3.65%

Asking Lease Rate $2.68 $2.61 $2.49 3.07%

Leased SF 6,478,716 9,531,321 8,499,231 -32.03%

Sold SF 7,335,179 6,878,175 10,932,637 6.64%

Net Absorption 345,393 1,400,351 621,637 N/A

SF

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2017

%

0

500K

1.0M

1.5M

2.0M

2.5M

3.0M

3.5M

4.0M

0

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

HISTORICAL NEW CONSTRUCTION & VACANCY RATE

New Deliveries

Vacancy Rate

HISTORICAL LEASING ACTIVITY & ASKING LEASE RATES

SF

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2017

$/SF

0

2M

4M

6M

8M

10M

12M

$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

Leasing Activity

Asking Lease Rate

HISTORICAL SALES ACTIVITY & MEDIAN SALES PRICE

SF

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2017

$/SF

0

3M

6M

9M

12M

15M

$100

$140

$180

$220

$260

$300

Total Square Feet of Sales

Median Price/Building SF

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

kiddermathews.com

ContactMark ReadExecutive VP, BrokerageSouthwest858.509.1200mread@kiddermathews.com

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Mark Read | LIC #00572743

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