Q1 2023 Commercial Real Estate 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.
The San Diego commercial real estate market saw mixed performance in Q1 2023, with negative absorption and rising vacancies in many sectors. Although most sectors saw average rents grow, construction and development continue to lag behind in many areas.
Despite the general slowdown, a handful of real estate pockets managed decent performance. The silver lining is that fundamentals remain solid and developers have been creatively managing supply shortages, indicating that declines in 2023 will most likely be minor.
Greater San Diego Commercial Real Estate Market Trends
The average price for all types of commercial real estate was $66.86 per square foot, with an average building size of 12,452 square feet. Average and median prices for San Diego commercial real estate have risen by 0.12% and 0.31%, respectively,
What Is the Vacancy Rate for Commercial Real Estate in San Diego?
Average vacancy rates across office, industrial, multifamily, and retail real estate in San Diego in Q1 2023 were about 4.74%. This average is slightly skewed due to office space vacancy rates being significantly higher than those of other property types.
Notable Commercial Real Estate Transactions in San Diego in Q1 2023
Below are some of the most notable commercial real estate transactions that took place in San Diego in Q1 2023.
- RL Jones' 240,975 square foot lease at 1610 Landmark Road;
- Ready Spaces' 79,611 square foot lease at 505 Main Street;
- Round One Entertainment's 56,589 square foot lease in National City;
- Broadcom Corporation's 90,610 square foot least at 16340 W Bernardo Dr; and,
- Rexford Industrial Realty's $200,000,000 purchase of 513,820 square feet in Kearny Mesa.
Most of these notable transactions were for warehouses and other types of San Diego industrial space.
San Diego Office Space Performance in Q1 2023
San Diego office space saw a fragmented quarter in Q1 2023, with 227,019 square feet of negative absorption as many companies continue to right-size. Vacancy rates rose 10 basis points over the quarter to 12.3%, but leasing activity increased by 15% compared to Q4 2022.
Asking rents also stayed static at $3.24 per square foot. Average asking rates for Class A, B, and C office space were $3.92, $2.90, and $2.27 per square foot, respectively. The submarket with the highest average office asking rates was Del Mar Heights at $4.91 per square foot.
San Diego Office Space Construction and Volume
San Diego added about 12,000 square feet of office space this quarter, bringing total inventory to approximately 86.8 million square feet. A little bit over 2 million square feet of Class A San Diego office space is under construction, with the majority of that new supply slated for urban and north San Diego submarkets.
One interesting trend to note is redeveloping old office buildings into multifamily and lab properties. Developers converted over 400,000 square feet of space this quarter, which slightly pushed down vacancy rates.
San Diego Industrial Real Estate Performance in Q1 2023
San Diego industrial space saw a mixed quarter, with positive absorption but falling leasing activity and static rents. Q1 2023 saw 118,776 square feet of positive absorption—down from 185,000 square feet in Q4 2022—and total vacancies saw a YoY increase of 70 basis points to 2.5%.
Direct asking rates for San Diego indsutrial real estate settled at $1.36 per square foot this quarter, registering a 16% YoY increase. The Miramar submarket had the highest average asking rates at $1.83 per square foot.
San Diego Industrial Real Estate Construction and Volume
Total industrial inventory reached over 128.15 million square feet after 346,128 square feet of deliveries this quarter. The San Diego industrial space market has over 2.5 million more square feet under construction, most of which will be in South County submarkets.
Although overall leasing activity slowed this quarter, certain pockets, like Central and South counties, saw strong performance. Sublease vacancies also increased to over 1 million square feet due to stalled demand for consumer products.
San Diego Multifamily Real Estate Performance in Q1 2023
San Diego multifamily real estate showed signs of moderating this quarter but still managed to eek out solid performance. Average multifamily market asking rates were $2,369 per month, representing 4.4% YoY growth and about 2% growth from Q4 2022.
Overall multifamily vacancies were at 4.0%, with Class A accommodations averaging a 6.8% vacancy rate. Demand for luxury accommodations has historically been the highest, but it is notably moderating this quarter.
San Diego Multifamily Construction and Volume
As of the end of Q1 2023, San Diego had approximately 7,700 units under construction, though housing demand and household formation far outstrips housing supply. Rising interest rates and permitting issues have caused construction costs to balloon, putting a damper on new San Diego multifamily production.
The San Diego city council has passed some measures to address supply constraints for dense, urban housing, but future construction projections are still low.
San Diego Retail Real Estate Performance in Q1 2023
San Diego retail space faltered this quarter, with negative absorption and falling rents. Retail saw 67,808 square feet of negative absorption, and average NNN lease asking rates fell slightly from $2.36 per square foot in Q4 2022 to $2.28 per square foot in Q1 2023. The Downtown retail submarket had the highest average asking rates at $3.42 per square foot.
However, vacancy rates have fallen nearly 60 basis points to 4.9%, and San Diego's employment is at 3.40%, slightly lower than the national average of 2.60%. The sector added 27,000 square feet of product to its inventory in Q1 2023, and about 93,000 square feet of San Diego retail space are under construction.
Is It a Buyers' or Sellers' Market in San Diego?
As of Q1 2023, San Diego is still mostly in a seller's market. Most San Diego real estate sectors are having trouble producing enough real estate to meet demand, meaning the owners of limited real estate can have their pick of buyers and tenants.
Supply for multifamily, in particular, is thin, meaning landlords can charge a premium for rent. Construction costs and permit delays have made it more expensive to build and buy commercial real estate.
The main exception to this trend is office space. Just like in San Francisco and Los Angeles, office space owners are having trouble filling space due to the proliferation of work-from-home and hybrid schedules.
Takeaways for San Diego Commercial Real Estate Investors
This quarter was fairly lackluster for San Diego, with office space, in particular, showing negative performance. Much of the slowdown is due to rising interest rates and inflation, although the latter seems to be moderating.
A handful of worried investors believe that California is due for a real estate crisis soon, but statistics seem to indicate those concerns are likely overblown. San Diego's job growth and unemployment numbers are good, and life sciences and logistics companies are driving strong demand for industrial real estate.
Office, industrial, and retail tenants are all showing a flight-to-quality, so investors can benefit by updating properties to draw second-generation tenants that are used to higher rents.
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