MARKET DRIVERS
ALTHOUGH LEASING activity was on an upward trajectory at the end of 2021 and beginning of 2022, the second half of the year experienced a notable dip in volume, dropping almost 50% YOY posting at 1.1M SF, the lowest level experienced since the end of 2020. As more leases set to expire, firms are likely to look at more prime space with better amenities, although with smaller footprints.
SAN DIEGO is one of the few major markets in the state that has seen positive net absorption in the office market since the pandemic hit. This can be attributed to the demand seen in the upscale, prime properties from high-tech firms such as Apple and biotech firms. Rents have also been rising, although that is expected to slow as demand softens.
DEAL FLOW in the San Diego office market slowed in the last half of 2022 amid high interest rates, as buyers have begun to show more caution. Investments for life science conversions have continued, reducing the inventory for office tenants further, but it is expected to slow as venture capital fell by more than 50% in 2022.
ECONOMIC OVERVIEW
UNEMPLOYMENT RATE for San Diego County in November was 3.3%, below the year-ago estimate of 4.5% and is on par with pre-pandemic levels. It is up ten basis points month-over-month, adding 16,100 jobs within the last month. This compares with an unadjusted unemployment rate of 4% for California and 3.4% for the nation during the same period.
ALTHOUGH SAN DIEGO’S office market is supported by a strong employment pool with diverse jobs in the tech, defense and life science industries, challenges will be met in the coming year with the cooldown in the economy. Many local firms, such as Bristol-Myers Squibb and Cue Health, are among firms that have announced layoffs in recent months.
NEAR-TERM OUTLOOK
THE FLIGHT to high-quality office space is a trend that will continue into the coming year. Companies are prioritizing employee proximity and focusing on retention with plug-and-play buildings that provide attractive amenities.
SAN DIEGO’S office market declined in the 2nd half of 2022, as firms began layoffs in anticipation of the cooled economy. This slowdown will continue as high interest rates and uncertainty surrounding the recession impact the decision making of investors and businesses.
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