TENANT OUTLOOK REPORT

SUMMMER 2014 | OFFICE

TENANT ADVISORY SERVICES

SAN DIEGO COUNTY

San Diegos office space vacancy lowest since 2006

MARKET OVERVIEW
San Diegos office market continues to strengthen with 210,000 SF of absorption in Q2 2014 thus increasing
the YTD total to 810,000 SF and causing office vacancy to drop to 13.4%, the lowest level since 2006.
North City West, consisting of Carmel Valley (8.2%), Sorrento Mesa (8.1%) and UTC (6.1%) continues to
outperform the market with a combined 7.5% direct Class A vacancy. Other tight Class A office markets
include Mission Valley (6.3%), Kearny Mesa (7.0%) and Rancho Bernardo Mesa (7.6%). As you would
expect, rental rates for these markets are increasing. However opportunities can be found in the Class B
office sector were the difference between Class A and B rental rates can reach 30%.

VACANCY BY SPACE TYPE

Q2 2014

Q1 2014

DIRECT

12.77%

12.90%

SUBLEASE

0.63%

0.71%

3.0

13.40%

13.61%

CHANGE

In June 2014, San Diego added 9,700 employees lowering the unemployment level to 6.1%. The job gains
were led by healthcare and the high-paying professional STEM fields (Science, Technology, Engineering,
& Math). Venture Capital (VC) investment for startup companies made gains in San Diego during Q2.
According to The Money Tree survey, 26 local companies raised $222 million last quarter. Most notably
were Otonomy ($49M), Verdezyne ($48M), Cidara Therapeutics ($32M), Sotera Wireless ($21M) and
Tealium ($20M). Furthermore, Illumina announced that it will increase its local operations by 300
employees.

NEW SUPPLY, ABSORPTION AND VACANCYHowever,

RATES Omnitracs, Websense and
HISTORICAL
RENTALwill
RATE
Active Network
be TRENDS
relocating a significant portion of their
TOTAL

A & Overall Office Rates

employees to Texas for tax incentive Class
perks.
Others, such as Microsoft, will be reducing their workforce at
Quarterly Average Asking Rate Per SF Per Month (Full Service)
20%
their Rancho Bernardo location and Allergen will be cutting 100 jobs in Carlsbad. Large office sublease
$3.10
vacancies, such 18%
as Cricket/AT&T (200,000
SF) in Kearny Mesa and American Specialty Health (190,000
$3.00
SF) in Sorrento 16%
Mesa have yet to be leased.
$2.90

2.5

14%

1.0

0.5
VACANCY
BY CLASS
0.0

Q2 2014

-0.5

Q1 2014

13.24%

CLASS A
-1.0

CHANGE

13.77%

$ / SF / Month (FS)

NET ABSORPTION
AND VACANCY
12%

1.5

Vacancy Rate

SF (Millions)

2.0

$2.80
$2.70

The Class A office

10% segment saw the most
$2.60 demand during Q2 with 167,000 SF of net absorption. Class C
office absorbed 8%
79,000 SF while Class$2.50
B office lost 36,000 SF. Carmel Valley (+77,000 SF) and Mission
$2.40positive net absorption in Q2. In Carmel Valley, Perkins Coie
Valley (+74,000 6%SF) recorded the most
$2.30
expanded and now
4% occupies 34,000 SF at Del Mar Gateway while iTron moved into 20,000 SF at Del Mar
$2.20
Tech Center. In 2%
Mission Valley, San Diego
Unified School District purchased the 40,000 SF River Bank
$2.10
Plaza as an owner/user.
$2.00
0%
Q2 Q3 of
Q4 117,000
Q1 Q2 Q3 Q4
Q4 Q1 Q2 Q3
Q4 Q1
Q2 Q3 Bank
Q4 Q1 Q2
posted negative net absorption
SFQ1inQ2Q2Q3primarily
from
Chase
vacating
09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14
131,000 SF.Q2The suburban submarkets of Campus
Point (31.6%), Torrey Pines (24.7%) and Scripps Ranch
(20.5%)Vacancy
maintain the highest vacancy rates in the county. Class A
All Classes

14.36%
2005 2006 14.15%
2007 2008 2009
2012 2013
2014
CLASS B 2003 2004
2010 2011
Rancho
Bernardo
11.50%

CLASS C

12.01%

Net Absorption

New Supply

Most of the Downtown (CBD) leasing activity continues to be the smaller 2,000 to 5,000 SF tenants with
landlords responding by creating speculative office space to fuel this demand. Many of these smaller firms
are startups that cater to the Gen Y offering unique perks and the buzz of working in the CBD. As a
bonus, the lease rates are more affordable as compared to the suburbs.
OFFICE LEASING ACTIVITY BY TENANT SIZE

OFFICE VACANCY RATES

OFFICE
VACANCY RATES
Q2 2014

Total Leases Completed

Q2 2014
Countywide Class A ($2.90/SF) and Percentage
Class Bof($2.25/SF)
ratesinincreased.
For Class A asking rates, Carmel
Valley averages $3.70/SF; UTC averages $3.35/SF; Sorrento Mesa averages $3.15/SF; Mission Valley
averages $2.80/SF and Downtown (CBD) averages $2.65/SF.

Q2 2014

27.9%

13.4%
13.2%

S.D. County

LARGE TENANT ACTIVITY AND OPPORTUNITIES

12.6%
11.9%

Suburban

18.8%
17.9%

Downtown
0%

5%
All Classes

10%

15%

20%

7.2%

2.7%

The largest signed lease transactions include: Synthetic Genomics1.9%

(70,000 <=
SF),
Human Longevity
2,000 SF [375]
(56,000 SF), Intercept Pharmaceuticals (47,000 SF) and Pathway Genomics (45,000 SF) all within the
2,001 - 5,000
SF [174](31,000
UTC area; the GSA Immigration Services (53,000 SF), AECOM (47,000 SF) and Arbor
Education
SF) in the CBD; Sheppard Mullins (54,000 SF) early lease renewal in Carmel Valley;
and
The
of
5,001 - 10,000 SF County
[45]
San Diego (33,000 SF) in City Heights. Several tenants are in negotiations at various projects throughout
10,001 - 20,000 SF [17]
San Diego, most notably the State of Californias Attorney General for over 100,000
SF in the CBD.
20,001 SF [12]
Executive suite operators have been absorbing a sizable amount of office space>=in
San Diego recently.
Specifically, Regus has construction underway at 3 new sites in Mission Valley, Kearny Mesa and Sorrento
Mesa bringing their San Diego total to 16. Real Office Centers is expanding with their 3rd location in the
CBD. Premier Business Centers has 4 locations, and Barrister
Executive Suites has 3 locations.
60.2%

Class A

TENANT ADVISORY SERVICES

Future CBD vacancy may be affected as the new landlord at 625 Broadway is planning to convert their
223,000 SF office building into residential units.
NEW SUPPLY AND CONSTRUCTION

CLICK

HERE
Colliers International

In Q2 2014, the 34,000 SF Quail Garden Corporate Center in Encinitas was completed with 24,000 SF
absorbed. In Carmel Valleys Torrey Reserve, American Assets has three additional office/medical/retail
buildings totaling 45,000 SF under construction.
Additionally, The Irvine Company is well underway on One La Jolla Center in UTC, a 306,000 SF Class
A office building targeted for completion in mid-2015. Cisterras 320,000 SF build-to-suit office tower
for Sempra Energy in Downtown is expected to be completed in late-2015. Construction is also nearing
completion on Qualcomms 410,000 SF building in Sorrento Mesa.

Accelerating success.

www.colliersTAS.com

TENANT OUTLOOK REPORT

SUMMER 2014 | OFFICE

TENANT ADVISORY SERVICES

SAN DIEGO COUNTY

OFFICE OVERVIEW
San Diego County Office Market
Q2 2014
EXISTING PROPERTIES

Submarket / Class

Bldgs

DOWNTOWN
A
B
C
TOTAL

VACANCY

NET ABSORPTION

Total

Direct

Sublease

Total

Prior Qtr

Net Abs

Net Abs

Inventory

Vacancy

Vacancy

Vacancy

Vacancy

Current Qtr

YTD

SF

Rate

Rate

Rate

Rate

SF

SF

20
25
13
58

7,257,266
2,231,597
683,662
10,172,525

16.8%
20.1%
24.4%
18.1%

1.0%
0.1%
0.0%
0.8%

17.9%
20.2%
24.4%
18.8%

18.6%
20.2%
24.5%
19.4%

54,316
(98)
542
54,760

(53,231)
2,791
6,134
(44,306)

MISSION VALLEY
A
B
C
TOTAL

13
64
67
144

2,017,208
3,454,191
1,606,330
7,077,729

6.3%
9.2%
8.4%
8.2%

1.0%
0.6%
0.1%
0.6%

7.4%
9.7%
8.4%
8.8%

8.6%
11.4%
8.2%
9.8%

23,873
57,119
(3,860)
77,132

1,931
67,167
(3,334)
65,764

KEARNY MESA
A
B
C
TOTAL

15
106
91
212

1,858,959
5,225,351
1,875,982
8,960,292

7.0%
13.4%
17.8%
13.0%

0.6%
0.2%
0.0%
0.2%

7.6%
13.7%
17.8%
13.3%

6.9%
13.7%
18.5%
13.3%

(11,951)
2,105
13,038
3,192

(16,973)
100,949
37,713
121,689

UTC
A
B
C
TOTAL

21
12
6
39

3,504,970
1,105,799
320,381
4,931,150

6.1%
22.3%
3.4%
9.6%

0.6%
0.0%
0.0%
0.4%

6.7%
22.3%
3.4%
10.0%

6.9%
20.0%
3.2%
9.6%

6,220
(26,004)
(518)
(20,302)

420,785
(67,517)
582
353,850

SORRENTO MESA
A
B
C
TOTAL

23
51
42
116

3,819,784
3,878,029
866,951
8,564,764

8.1%
8.3%
8.3%
8.2%

0.8%
0.4%
0.0%
0.5%

8.9%
8.7%
8.3%
8.7%

8.7%
8.1%
9.6%
8.5%

(8,221)
(23,188)
10,976
(20,433)

(57,133)
(51,107)
20,005
(88,235)

CARMEL VALLEY
A
B
C
TOTAL

44
25
1
70

3,787,819
1,253,709
13,914
5,055,442

8.2%
14.6%
0.0%
9.8%

2.6%
3.0%
0.0%
2.7%

10.9%
17.7%
0.0%
12.5%

12.2%
19.6%
0.0%
14.0%

49,295
24,323
0
73,618

194,778
1,912
0
196,690

RANCHO BERNARDO
A
B
C
TOTAL

19
58
25
102

2,232,431
2,651,871
490,093
5,374,395

7.6%
13.6%
9.1%
10.7%

0.8%
0.0%
0.0%
0.3%

8.4%
13.6%
9.1%
11.0%

9.1%
8.4%
10.2%
8.8%

15,720
(137,851)
5,383
(116,748)

(1,551)
(112,012)
8,148
(105,415)

CARLSBAD
A
B
C
TOTAL

44
108
36
188

2,000,467
2,939,858
512,717
5,453,042

19.8%
15.4%
16.4%
17.1%

1.4%
1.1%
0.4%
1.1%

21.2%
16.5%
16.8%
18.3%

21.9%
16.7%
19.0%
18.8%

14,699
3,328
11,136
29,163

SAN DIEGO COUNTY OFFICE

A
275
B
970
C
1,145
TOTAL
2,390

31,374,544
35,329,524
15,370,182
82,074,250

12.2%
13.9%
11.3%
12.8%

1.0%
0.5%
0.2%
0.6%

13.2%
14.4%
11.5%
13.4%

13.8%
14.2%
12.0%
13.6%

166,825
(35,824)
78,557
209,558

Average rental rates are defined as the average asking monthly rate per square foot normalized to a full service gross basis.

Colliers International

Accelerating success.

www.colliersTAS.com

(9,222)
24,060
692
15,530
463,493
253,890
86,231
803,614

TENANT OUTLOOK REPORT | SUMMER 2014 | OFFICE | SAN DIEGO COUNTY

RENTAL RATES

Y RATES
HISTORICAL RENTAL RATE TRENDS
HISTORICAL RENTAL RATE TRENDS

For the last two years, the

countywide average asking
rental rate has steadily
increasing from a low of
$2.10/SF on a full service
gross basis. Q2 2014 was
the tenth consecutive
quarter where the rate has
either increased or remained
flat with the current rate of
$2.24/SF exhibiting a $0.04
increase during the quarter.
The Class A rate also posted
quarterly
Q2 aQ3large
Q4 Q1
Q2 Q3 Q4increase
Q1 Q2 of
12 $0.04
12 12 to
13 $2.86/SF.
13 13 13 14 14

Class A & Overall Office Rates

Class A & Overall Office Rates
Quarterly
Average Asking Rate Per SF Per Month (Full Service)
Quarterly Average
(Full Service)
20%Asking Rate Per SF Per Month
18%

$3.10
$3.00

$ / SF / Month (FS)

Vacancy Rate

$ / SF / Month (FS)

$3.10
$3.00
16%
$2.90
$2.90
14%
$2.80
$2.80
12%
$2.70
$2.70
10%
$2.60
$2.60
$2.50
8%
$2.50
$2.40
$2.40
6%
$2.30
$2.30
4%
$2.20
$2.20
2%
$2.10
$2.10
$2.00
0%
$2.00
Q2 Q2
Q3 Q3
Q4 Q4
Q1 Q1
Q2 Q2
Q3 Q3
Q4 Q4
Q1 Q1
Q2 Q2
Q3 Q4 Q1
011 2012 2013 2014 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
09 12
09 12
09 12
10 13
10 13
10 13
10 13
11 14
11 14
11 11 12
Q2 09 09 09 10 10 10 10 11 11 11 11 12
Vacancy

Class A

All Classes

Class A

All Classes

485 offices in
63 countries on
6 continents
United States: 140
Canada: 42
Latin America: 20
Asia Pacific: 195
EMEA: 85
$2.1

billion square feet under

management

Over
$75

LEASING ACTIVITY

LEASING
OFFICE LEASING ACTIVITY BYOFFICE
TENANT
SIZE ACTIVITY BY TENANT SIZE

Percentage of Total Leases Completed in Q2 2014

A total
of 623
leases
were
Percentage
of Total
Leases
Completed in Q2 2014
completed in Q2 totaling 1.9
million square feet. This
7.2%
7.2%
equated to 27.9%
a 12% increase in
27.9%
2.7%
total leases compared to Q1
2.7%
2014. Leasing volume will
1.9%
1.9%
<= 2,000 SF [375]
likely continue to be robust in

2014, allowing vacancy to

continue to decrease while
fueling rental increases due to
the accelerated demand.

billion in annual revenue

1.46

15,800 professionals

billion USD in total transaction value

Tenant Advisory Services

www.ColliersTAS.com
<= 2,000 SF [375]

2,001 - 5,000 SF [174]

2,001 - 5,000 SF [174]

5,001 - 10,000 SF [45]

5,001 - 10,000 SF [45]

10,001 - 20,000 SF [17]

10,001 - 20,000 SF [17]

>= 20,001 SF [12]

>= 20,001 SF [12]

> Only represent tenants in their

office lease and purchase
negotiations
> Provide objective conflict-free
advice with full service
resources
> Increase profitability &
mitigate risk

60.2%

60.2%

RON MILLER
Senior Director
Tenant Advisory
Services

OFFICE SPACE TIME-ON-THE-MARKET

Average Months by Submarket and Class

858.677.5363
LIC # 00874868

35
30

21.4
13.1
16.9

Carmel
Valley

Rancho
Bernardo

17.1
16.1
15.4

Sorrento
Mesa

Class B

19.2

29.4
Class A

UTC

16.5

Kearny
Mesa

www.ronmillersd.com
18.1
16.0
17.1

Downtown

17.5
14.4
15.3

Mission
Valley

9.6
14.9
10.5

16.7
21.3
17.9

10

20.7
14.7
13.8

15

19.8
23.3
17.1

Months

25
20

Carlsbad

San Diego
County

All Classes

TIME ON MARKET
Time-on-the-market for Class A office space is averaging 17.1 months countywide.

Ron Miller is a tenant advisory

specialist. His expertise encompasses
relocation/expansion/contraction
strategies, lease renewal and
restructuring, market analysis, and
user purchase opportunities. With
his extensive career experience
in representing both tenants
and landlords, Ron offers a
unique perspective and valuable
insight to his tenant clients.

COLLIERS INTERNATIONAL
4660 La Jolla Village Drive, Suite 100 San Diego, CA 92122 | USA
TEL +1 858.677.5363

This report has been prepared by Colliers International for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made
as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their
own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes
all liability for loss and damages arising there from.

Colliers International

Accelerating success.

www.colliersTAS.com

Accelerating success.