New Office Leases Considerably Smaller Than Pre-Pandemic
(Corrected Feb. 3 to reflect international law firm Cooley will be relocating from University Town Center in the sixth paragraph.)
San Diego office leasing has fallen to its lowest level in 20 years amid the pandemic. The retrenchment has spread across the region, sparing few submarkets from the marked slowdown in office demand.
The final three quarters of 2020 each recorded less than 1 million square feet of new leases signed in the San Diego office market. Not only was that the first such stretch, it was the first time that a single quarter fell below that level in 20 years.
But 2020 didn’t start off slowly. The two largest leases of the year were signed during the first quarter.
Apple branched out from its office locations in University Town Center and leased 200,000 square feet in February at Summit Rancho Bernardo. Fate Therapeutics leased a similar amount of space in Scripps Ranch at Scripps Northridge. Fate Theraputics signed in January and will more than double it’s footprint when it relocates from Torrey Pines this year.
But those were signed before the pandemic, and things have changed, particularly the leasing habits of tenants.
Cooley was the only other tenant to sign a new lease in San Diego for more than 50,000 square feet in 2020. The international law firm leased 75,000 square feet at one of the three buildings at the Boardwalk development in Torrey Pines and will relocate from roughly 90,000 square feet in University Town Center when the new building is complete.
Much like the retail sector, office tenants showed more caution through the year as companies evaluated physical space needs amid the pandemic.
With the majority of office-using tenants working remotely, there is a possibility that many employees will return to the office only part-time once a wide distribution of a vaccine is available. The average office lease in the final three quarters was considerably smaller than pre-pandemic.
From the beginning of 2018 through the first quarter of 2020, the average office lease in San Diego was roughly 3,700 square feet. Amid the pandemic, the average lease signed was about 2,650 square feet, representing a 27% drop. That’s almost 500 square feet smaller than the average lease signed here during the height of the great recession.
And that cautious approach was ubiquitous across the region. In University Town Center, the average lease size has fallen by 25%, to less than 6,900 square feet. Mission Valley had one of the smaller declines in San Diego. Mission Valley’s average lease size during the pandemic was 2,525 square feet, a 23% drop compared to 2018 through the first quarter of 2020. In downtown San Diego, the drop was 38% with the average lease signed of only 2,700 square feet. Sorrento Mesa has also recorded a 38% drop in the average lease size, down to 5,060 square feet.
The long-term ramifications of the pandemic will take longer to play out beyond just the wide distribution of the vaccine. We have already heard of tenants moving employees to full-time remote working. This is allowing their leases to expire in the process or putting their space up for sublease. Tenants will likely continue to evaluate their space needs even following the pandemic, which could lead to a rocky recovery in the office market in San Diego.