SUBLET SPACE continues to rise as a result of office employees still working from home and tenants reassessing their space needs. Approximately 2.4M SF of sublease availability was on the market at the end of the 1Q This is an increase of 44% over the past 12 months and the most amount of sublet space on the market in over 15 years.
ALTHOUGH LEASING ACTIVITY DROPPED SIGNIFICANTLY YOY major tech firms appear to be behind a few of the larger spaces that have been leased, among them being Apple and Google with the top two lease transactions in Q1. Though these companies have successfully transitioned to work from home, it still appears they see value in the face-to-face collaboration and problem solving in the long-term future.
ALTHOUGH AVERAGE ASKING RENTAL RATES HIT AN ALL-TIME HIGH rent growth has notably cooled when compared to the five-year average. While many landlords remained steadfast on their asking rents in anticipation of the market recovering, many others lowered their asking price towards the end of last year. Landlords are facing pressure in achieving their market rents from the increasing amount of sublet space coming online that averages $.30/SF less than direct space.
DESPITE AN ECONOMIC SLOWDOWN in 4Q of 2020 due to the spike in cases of the novel coronavirus at year end, the outlook for 2021 is headed in a positive direction. With the federal and state stimulus packages, coupled with historically low interest rates, it is predicted that economic activity in the region will increase steadily over the next few quarters.
UNEMPLOYMENT RATE in January increased one basis point to 8.1% month-over-month and above the year-ago rate of 3.4%. This compares with an unadjusted unemployment rate of 9.2% for California and 6.8% for the nation. San Diego’s total nonfarm employment fell by 153,700 jobs year over year, with the leisure and hospitality sector taking the biggest hit as a result from the statewide mandated stay-at-home orders and travel restrictions.
AS NEW CASES OF THE VIRUS ARE FALLING at a precipitous rate, and more than 1M doses of the vaccine are being administered daily, it is likely that we could see a shift as employees may soon be returning to the office. While this may be a slow transition in staggered phases, some companies may never return to their in-person daily office routine, pre-pandemic.
THE SAN DIEGO OFFICE MARKET will continue to face challenges due to the impacts of COVID-19. Leasing activity is expected to remain low in the coming quarters and sublease availabilities will continue to rise, and as such, annual rent growth could turn negative as landlords face pressure to lease out their vacant spaces.