San Diego’s office market continues to navigate turbulent waters, as evidenced by its third consecutive quarter of significant negative net absorption in the first quarter of 2024. According to a first quarter office market report for the region by JLL, the market continues to see higher than average vacancy rates which could be remedied by growing trends in adaptive reuse.
“In Q1, the San Diego office market experienced its third consecutive quarter of negative net absorption exceeding 100,000 square feet. The performance of the San Diego office market remains uneven, with the suburban market continuing to outperform the urban Downtown market,” said Pat Ashton, JLL Research Manager.
Overall, the first quarter finished with a 13.3 percent vacancy rate, and recorded a year to date negative net absorption of 543,193 square feet.
Despite the increased vacancies, there is optimism in the market as several buildings are expected to be repurposed into lab spaces, multi-housing units, or other alternative uses. This trend reflects the ongoing transformation of office spaces to meet evolving market demands.
The suburban market remains resilient, supported by innovation sectors such as technology, life sciences, and defense companies. These sectors account for 48 percent of current office leases, contributing to the suburban market’s low vacancy rate of 11.6 percent, which is among the lowest in the country, according to the report.
However, the Downtown submarket faces challenges with a vacancy rate of 23.9 percent, expected to rise further with the completion of three major projects slated for 2024. Downtown’s office rents have declined by 11.5 percent over the past year, impacting the overall asking rents, which have dropped for the fifth consecutive quarter, falling by 4.4 percent year-over-year. According to JLL, the first quarter ended with an average asking rental rate of $3.26.
As landlords adapt to the shifting market conditions, they are offering generous concessions to attract tenants, including creating speculative office suites or dividing floors. Despite these efforts, demand from new large block tenants remains limited, contributing to the decline in overall asking rents. Looking ahead, the office market in San Diego continues to face uncertainties, but the adaptive reuse of vacant buildings and the resilience of the suburban market provide some stability amid the ongoing challenges.
“Despite increased office vacancies, many buildings are expected to be converted into lab spaces or apartments, which will continue to shrink the office stock and reduce vacancy,” Ashton said.
