Q3 2022 Office Space Report: San Diego, CA
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
San Diego County is no stranger to difficult economics, with inflation, gas prices, and housing costs presenting formidable obstacles. Making matters worse, the area faces economic uncertainties that rival those of other areas in the US.
The San Diego office market saw average vacancies rising from 9.2% last quarter to 10.8% and held an unemployment rate of 4.7%.
Signs of post-pandemic recovery could bring an influx of employment opportunities, with the unemployment rate at 3.2%, lowering than the nation’s average. That said, these expectations should be tempered by the tough and uncertain economy still present.
General Area Overview & Demographics
San Diego, California, is a vibrant and diverse city that has become a hub for businesses in recent years. San Diego’s population of 1.43 million people, according to the United States Census Bureau, makes it the second-most populous city in California and the eighth-most populous city in the nation.
San Diego’s ethnic composition makes it one of the most diverse cities in America. San Diegans identify their ethnicity as follows: 41% White (non-Latino), 29% Latino/Hispanic, 16% Asian/Pacific Islander, 8% African American/Black, 4% two or more races, and 2% Other Race.
The median household income in San Diego is $69,753 per year according to census data from 2019 to 2023: This is higher than both California state median household income ($67,739) and U.S. median household income ($68,703). San Diegans are largely employed in professional services (13%), educational services (11%), healthcare (10%), and retail trade (9%).
San Diego has a mild, Mediterranean-style climate, with an average temperature of 70.5°F throughout the year. San Diego is known for its near-perfect weather, with more than 300 sunny days each year, making it one of the most desirable places to live in California.
San Diego’s ideal weather, stunning beaches, mountain views, and world-class dining and entertainment options make it one of the most popular tourist destinations in the United States. San Diego is also home to some of the world’s most renowned attractions, such as SeaWorld San Diego, San Diego Zoo, Balboa Park, and Mission Beach.
Summary of San Diego Office Space Performance in Q3 2022
Compared to last quarter, Class A office space vacancy increased to 16%, Class B held steady at 11.7%, and Class C space decreased to 7.2%. Vacancy is highest in the Downtown/CBD region at 26.8%.
Vacancy was down in that region due to negative absorption in Downtown (-49,000 square feet) and Scripps Ranch (-168,000 square feet). A prominent tenant, MedImpact, was among those that vacated, leaving nearly 160,000 square feet of space behind.
While some other markets saw positive absorption and a decrease in vacancy as well, vacancy has trended upward in this quarter.
What are Office Space rents like in San Diego?
Average asking rental rates have held steady from last quarter to this quarter, currently sitting at $3.02 per square foot, only a penny less than the previous quarter.
Class A rents have also held steady, currently around $3.50 per square foot.
Whether a slight increase or decrease, all submarkets only saw upwards of a $0.05 difference quarter-over-quarter.
Purchase & Leasing Activity
Apple acquired seven properties totaling 816,000 square feet for $445 million. This assisted in bolstering 2022’s year-to-date sales to over $1 billion. Overall, the sales price per square foot has increased from $360 to $380 over the past year.
Leasing activity slowed in Q3 to just over 1.5 million square feet, a 500,000 square foot reduction from the quarter prior. Over 55% of that leasing activity took place in Central San Diego.
Notable Office Space Deals in San Diego in Q3 2022
There were several leasing & acquisition deals for office space in San Diego this quarter.
- Apple’s acquisition of 158,000 square feet for $103 million;
- Global Equity acquisition of 133,000 square feet for $30.5 million;
- Google’s leasing of 106,000 square feet; and
- Apple’s leasing of 95,000 square feet.
These are select examples among other sales and lease activities for San Diego office space.
New Office Space Development Activity in San Diego in Q3 2022
There are currently close to 1.2 million square feet worth of projects under construction; however, there has been no new supply this quarter since last quarter.
Over 10% of the space in the pipeline has been pre-leased as of the end of the quarter, and it’s projected that 900,000 square feet of what’s under construction will be completed over the next five quarters.
Market Forecast for San Diego’s Office Space Market
With economic headwinds remaining to loom over a cooling market, there are reasons to believe this may be a sign of what’s to come in the near future.
Businesses are still struggling to assess how to best approach a hybrid work model, allowing employees to work from home days of the week but also acquiring them to come to the office.
Along with needing to lay off to cut costs with increasing inflation, it’s unclear how this market will perform as long as interest rates continue to rise.
Takeaways for Office Space Investors
San Diego’s office space market has shown significant signs of slowing down as 2022 has progressed. There’s a lot of uncertainty about what this market holds in the upcoming quarters and 2023.
While nothing can be said for sure, and each investor will have to do their research, one might want to consider investing elsewhere if an opportunity presents itself with more favorable indicators.
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