CoStar Market Insights: Some Northern Coastal San Diego Submarkets See Slowing Office Rent Growth

Although San Diego office rent growth slowed down markedly in 2016 compared to the previous two years, 2017 is poised to post a better year-end number as growth remains healthy.

Positive rent growth permeates the metro and with stable fundamentals, no downward pressure is evident.

Not all landlords in San Diego are reaping the rewards of continued growth this year, however. Here are a few submarkets where owners are feeling the pinch.

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UTC’s office rent growth has decelerated considerably from its strong run over the last several years after hitting almost 14% in both 2012 and 2014. In 2016, annual growth ended up in the red, giving back nearly 5%. And while the decline has been less precipitous so far this year, it has still not climbed into the black.

The weight of new inventory, including renovated campuses and new construction; already high rents that average $44 per square foot, and high vacancies are all weighing on growth. After one more speculative building delivers this year, the submarket is expected to receive a respite of new inventory, allowing the UTC submarket to catch its breath.

Sorrento Mesa

Sorrento Mesa has still not fully recovered from Qualcomm’s office closures in 2015, which sent vacancies skyrocketing. Although several tenants ranging from Google to Dexcom have moved into significant office space in the interim, helping fundamentals stabilize to a degree, high vacancies finally impacted rent growth last year, when it ended 2016 in the red after rising by more than 30% between 2012 and 2015. Although the pipeline is bare, a surfeit of available space still weights on growth prospects.

Del Mar Heights/Carmel Valley

While annual rent growth has not ended any year during the current cycle in negative territory in the Del Mar Heights/Carmel Valley submarket, growth was negative during the second quarter of 2017.

Del Mar Heights/Carmel Valley shares a number of characteristics with UTC, with both being premium submarkets with rents in the top two in the San Diego market both having a draw for employers. However, elevated vacancies and continuous new construction have slowed growth, even ithough both metrics have improved following a poor showing during the prior four quarters.

While One Paseo isn’t expected to get underway until the end of this year, with delivery not likely until 2019, the project could keep vacancies elevated and consequently, rent growth stymied, if leasing commitments don’t firm up prior to delivery.

CoStar Market Insights is a new feature providing a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 206 metro areas, with a granular understanding of the projects, players and economic trends that move these markets. Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.