MARKET DRIVERS
Vacancy rates throughout the San Diego Office market continued to rise, increasing by 90 basis points (bps) year-over-year (YOY). Throughout the market vacancy rates decelerated quarter-over-quarter (QOQ), only increasing by 10 bps to 13%. Total availability rates ticked up slightly to 19.3%.
Year-to-date (YTD) leasing activity totals 3.5M SF, nearly a 31% decrease from the 5.1M SF reported through the same time period last year. Direct net absorption remained negative for the third consecutive quarter at negative 45.4k SF. Additional movement within the sublease market pushed total net absorption to positive 48.4k SF in 3Q24. YTD direct net absorption remains firmly negative, totaling negative 737k SF.
Over 1.1M SF of office properties traded hands this quarter, accounting for 48.7% of 2024’s total sales volume. YTD sales volume totals 2.4M SF, an 82.7% increase from the first three quarters of 2023. Quarterly sales volume surpassed 1M SF for the first time since 3Q22’s 1.8M SF and has caught up to the 5-year quarterly average of 1.1M SF.
ECONOMIC REVIEW
The unemployment rate throughout San Diego County was 5.0% in August 2024, 60 bps higher than the year-ago estimate of 4.4%. California reported an unadjusted unemployment
rate of 5.9% in the same period.
The County experienced a gain of 1,600 jobs in total non-farm employment between July and August. Year-over-year total nonfarm employment increased by 10,800 jobs led by the
private education and health service sector.
In Mid-September, the Federal Reserve cut interest rates as inflation has shown signs of moderation. Forecasts point to further potential rate cuts before year’s end.
NEAR-TERM OUTLOOK
Office availability rates remain significantly elevated, spanning nearly 20M SF currently marketed for lease. Growing availability rates coupled with the tightening labor market, a general reduction in of fice size requirements, and several new office developments that are currently scheduled for delivery without a tenant will continue to strain vacancy rates throughout the market.
The recent interest rate cut, enacted by the Federal Reserve, will likely generate new demand in the investment sales market. Sales activity may only begin to accelerate in mid-2025 due to the possibility of additional rate cuts.
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