Well we are just over seven weeks into the new year and I hope your business is off to a great start.  My post today is to pass on what I see happening in the commercial real estate market moving forward this year.  Before we move forward, however, let’s look back over our shoulder at the landscape of the 2013 year end trends.

By the numbers, the average vacancy rates for office space in San Diego County were as follows; Class A office 10.7% vacancy, Class B office 14.4% vacancy, and Class C office 7.7% vacancy.  The overall trend in all three categories was a slight decrease in vacancy during the course of the year and is one that has remained in place for the last few years.

Year-end Class A vacancy rates by select submarket:

Downtown                               13.8%
Mission Valley                           7.8%
UTC                                           7.5%
Carlsbad                                  20.8%

Source: CoStar Group-The CoStar Office Report Year-End 2013 San Diego Office Market

These positive trends are cause for optimism moving forward into 2014.  Almost every city nationwide has a positive outlook for their office markets.  On a macro level, cheap borrowing costs have allowed for increased capital into the economy, which fuels more research & development and venture capital investment into businesses.  This is the case in San Diego and as a result many companies are in hiring mode which fuels increased demand for office space.  Here’s what Jerry Nickelsburg, a senior economist at the UCLA Anderson School of Management had to say about San Diego’s employment outlook:

“(There’s been a) Consistent increase in employment as we’ve been going  through the recovery.  San Diego is almost fully recovered in terms of employment from
the 2008-9 recession.  San Diego was not over built at the time of the recession so now we’re seeing a tightening of space…and we’re expecting that to continue for the next few years.”

The Irvine Company, one of the largest institutional landlords in the county, seems to agree.  They are currently building a speculative office tower in UTC.   The Irvine Company is the largest Class A landlord in UTC and have a vacancy rate within their portfolio lower than the total Class A year end vacancy rate of 7.5%.  They feel the UTC market is healthy enough to absorb a large amount of additional office space.

What does this mean for tenants in the market for new office space?  A healthy rental market traditionally means fewer landlord concessions and incentives to lease space.  Most institutional landlords see the market getting healthier.  There are still submarkets with stubbornly high vacancy rates relative to the county averages so opportunities to win concessions when negotiation lease contracts still may exist.  Regardless of your personal opinion on the direction the overall economy is taking, the current landlord thinking is things are getting better.  Moving forward expect a tightening in markets and fewer concessions until such time as the current view of things is proven wrong.

We are currently offering a lease review free of charge to compare your current situation with what’s happening in the market.  Based on what we find, and your timing, there may be negotiating strategies which can be employed to keep occupancy costs under control even in this environment.  Please note my plan is to blog general market conditions on a quarterly basis.  I will primarily use this post to pass on information regarding specific lease provisions and negotiating strategies I think would be beneficial to you.  We also plan to host several webinars on additional commercial real estate topics throughout the year so keep an eye out for that schedule.  As always, if you have any questions regarding San Diego’s office markets, or would like to discuss your specific requirement, please do not hesitate to contact me at brian@bradvisors-sd.com or 760-445-9908.

To your continued success.