Office Demand in San Diego Unlikely to Rebound in 2024

Low Levels of New Leasing Activity Expected Throughout Year

By Joshua Ohl
CoStar Analytics

January 17, 2024 | 7:31 AM

Last year ended much like it began in San Diego, with low office leasing volume. Leasing activity stumbled at the end of 2023 with only 1.2 million square feet of new leases signed during the fourth quarter. Although that metric could rise following some lingering lease deals pending collection by CoStar research, it represented the lowest quarterly leasing volume in 2023 and could match the lowest level since 2020. Market participants expect that 2024 will be much the same as it was last year.

The average new lease deal shrunk by 16% in 2023 compared to the average new lease signed between 2015 and 2019 in San Diego. Overall leasing activity — as measured by the number of new leases executed — also shrunk by 12%. Notably, there was not a corresponding rise in renewals across the region, and renewals as a percentage of leasing activity was the same as it was between 2015 and 2019.

Tenants are increasingly moving toward efficiency with their space needs, typically rightsizing their occupancy into smaller footprints. That trend is not expected to be disrupted in the coming year.

That rightsizing impulse can be gleaned in leasing activity for the largest spaces, which has largely dried up in the past year. New deals for more than 25,000 square feet accounted for a mere 11% of total leasing volume. In 2022, those deals represented 35% of new leasing volume, and the 4% of leasing volume for spaces above 50,000 square feet fell below 10% of volume for the first time in more than five years.

Smaller tenants and leases have also driven leasing activity in San Diego over the years, but 2023 was the first time in five years that deals for less than 5,000 square feet consumed more than 50% of leasing volume.

Some market participants have pointed to prime office nodes such as University Town Center, or UTC, with concern, where Apple had been driving leasing activity with several new leases signed between 2018 and 2022 that likely exceeded 800,000 square feet. At the start of 2024, the firm announced that it was moving more than 100 workers to Texas, a move that could decrease space needs. With Apple seemingly no longer in expansion mode as it stabilizes its local workforce and footprint, there is concern that there are few tenants in search of large requirements that might alter the near-term outlook of softer demand and weakening rent growth. The 212,000-square-foot La Jolla Commons III, for instance, was completed in mid-2023 and remains fully available for lease.

No other area of San Diego is exposed to as much available sublet space as UTC. There’s roughly 550,000 square feet — nearly 6% of existing inventory — available, although it is coming off a peak of more than 600,000 square feet in 2023. Vacancy and availability in the neighborhood have more than doubled since the end of 2019, and softer demand is forecasted to keep the vacancy rate in double digits through 2024.

University Town Center should ultimately recover its lost occupancy given that few areas of the region provide similar drivers of demand: The area is lined with new buildings, boasts unmatched neighborhood amenities, and houses some of San Diego’s core financial, life science and high-tech industries. It might just take a few more quarters for demand to stabilize.

(Posted with Permission from CoStar)