San Diego, with its picturesque coastal charm, mild climate, and thriving economy, is not only a desirable place to live but also an enticing destination for commercial real estate investors. From its robust job market to its diverse industries, San Diego offers an array of investment opportunities for those looking to venture into the world of commercial real estate. In this blog, we will explore its commercial real estate market trends.
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The Current Landscape of San Diego's Commercial Real Estate Market
Nestled along the coastline with a temperate climate, San Diego stands as an appealing destination for residence, business endeavors, and entrepreneurial pursuits.
Bolstered by a robust economy, the city offers an abundance of opportunities for both established enterprises and budding entrepreneurs.
San Diego proudly hosts an array of notable corporations, including industry giants like Qualcomm, Illumina, and Sempra Energy, as well as a multitude of innovative startups. With its strategic closeness to Mexico, San Diego emerges as a strategic hub for businesses aiming to access the Mexico market or leverage the benefits of NAFTA.
Within the metropolitan area, an impressive spectrum of properties awaits potential investors eyeing the realm of San Diego's commercial real estate.
The city's population is on the rise, consequently heightening the demand for office spaces and rental units to unprecedented levels.
San Diego's rich offering of amenities, ranging from picturesque beaches to captivating mountains, adds to its allure.
Investment in commercial real estate in this vibrant region can indeed be a shrewd decision for business owners and investors keen on harnessing the dynamic growth potential that characterizes this thriving locale.
San Diego's Regional Overview
San Diego County’s population has experienced a remarkable surge, witnessing a substantial 6.6% increase per the latest census data—outpacing even the growth rate observed across the entire state of California.
Within this expansive landscape, close to 1.4M individuals call San Diego their home, while the broader expanse of San Diego County houses around 3.3 million inhabitants.
Notably, San Diego stands as the 2nd most populous city in California.
Prominent cities forming part of this bustling metropolitan arena include El Cajon, Carlsbad, Escondido, Oceanside, and Chula Vista.
An impressive 88 percent of residents hold at least a high school diploma, while a notable 42 percent of the populace boasts a bachelor's degree or higher—significantly surpassing the educational attainment rate in California by a margin of approximately 20 percent.
San Diego's median age stands at 36.9, mirroring the median age observed across California.
San Diego Employment Landscape
The workforce in San Diego comprises close to 1.6M employed individuals, showcasing a YoY growth of 0.3%. Notably, the rate of poverty has witnessed a remarkable decline of 5.75% over the former year, while the unemployment rate in San Diego has decreased to an encouraging 3.3%, as corroborated by US Bureau of Labor Statistics.
Key job sectors that have displayed substantial growth encompass education, professional & business services, healthcare, information technology, leisure, hospitality, plus government services.
Prominent employers in the region encompass esteemed entities such as the University of San Diego, Kaiser Permanente, Cubic Corporation, Qualcomm, Scripps Health, Pulse Electronics, and the US Navy.
The metropolitan area hosts a diverse array of educational institutions, including the UC San Diego School of Medicine, San Diego State University, and the University of California San Diego.
Earning accolades as a top location for life sciences and biosciences and recognized as one of the world's most innovative cities, San Diego thrives due to its strategic location near the Pacific Ocean, adjacent to Mexico—a factor that significantly contributes to its prowess in international trade plus commerce.
Office Market of San Diego Q2 2023
In 2021, the San Diego office market showcased a more favorable performance compared to its neighboring counterparts. This was primarily attributed to the diminishing availabilities stemming from the rapid expansion within the life sciences sector. Subsequently, the market landscape has undergone a transformation, witnessing a surge in available sublet spaces, nearly twice the volume observed in 2021. The principal forces shaping office space occupancy in San Diego—the technology and biotechnology industries—have encountered a challenging phase characterized by substantial layoffs. Consequently, several occupiers have made the decision to relinquish their existing office footprints.
Inventory: 4.09 msf
San Diego's second quarter of 2023 witnessed a surge in new office construction, with a total inventory of 4.092 million square feet. This figure reflects an increase from the previous year's 3.9 million square feet of office construction.
Net Absorption: -422k sf
The second quarter brought about a net absorption of 422,933 square feet, indicating negative absorption. This trend aligns with the downward absorption observed in the previous quarter, which stood at 173,000 square feet of negative absorption.
Asking rent: $37.28 psf
The requested lease rate for office spaces in San Diego stood at $37.28 per square foot on an annual basis. This marks a rise of $0.27 from the previous quarter's rate.
The total vacancy rate for this quarter reached 12.7%, comprising a direct vacancy rate of 11.2% and a sublet vacancy rate of 1.5%.
Investment Sales: $438.62 psf
Since the commencement of the year, the sale price per square foot has attained a noteworthy $438.62, culminating in a total sales volume of $390,405,447.
Industrial Market of San Diego Q2 2023
In comparison to the pre-pandemic standards, both vacancy and availability persisted at tight levels. However, during Q2, there was a 40 basis points increase in the total vacancy rate, reaching 3.6%, and a 70 basis points expansion in total availability, reaching 6.5%.
Net absorption experienced its fourth consecutive quarter in the negative zone and saw an increase from Q1, reaching (802,625) square feet.
Leasing activity, which surpassed just over 1.6 million square feet, marked one of the rare instances in recent quarters when it fell below the 2 million square feet mark.
The average base-level asking rate continued its upward trend, surging by $0.06 to reach $1.43 on a triple net (NNN) basis. However, the high-finish rents exhibited quarter-over-quarter (Q-o-Q) volatility, declining by $0.14 to reach $1.66 NNN.
During Q2, the county welcomed a solitary new industrial project, a 346,128-square-foot build-to-suit in Downtown. Additionally, there were 2.3 million square feet under construction, which significantly lagged behind the peak levels observed in 2020-21.
Retail Market of San Diego Q2 2023
San Diego remains a robust and competitive retail market, demonstrating its resilience through factors like a stabilizing vacancy rate, positive net absorption, and an upswing in leasing activity. These factors contribute to the city's enduring appeal to retailers.
The trajectory of demand and leasing activity is on the rise, evident by the rebound in net absorption this quarter, reaching 21,092 square feet after a negative Q1 performance. With this surge in demand, leasing activity has also enjoyed a significant uptick of 30%. This consistent increase in demand and activity reaffirms that San Diego maintains its appeal as an enticing market for retailers to thrive.
On the front of vacancy rates, there are signs of stabilization as the Q2 2023 rate of 5.0% closely aligns with the rate recorded in Q1 2023. San Diego's historically low vacancy levels combined with this stabilization further underline the overall health of the market.
In terms of lease rates, there has been a consistent downward trend over three consecutive quarters. This quarter, the average asking lease rates observed a marginal decrease, moving from $2.28 to $2.25 on a triple net (NNN) basis.
Multi-Family Market of San Diego Q2 2023
During the second quarter, the multifamily market in San Diego exhibited continued signs of strengthening, marked by upward movements in asking rents and a noticeable tightening of the vacancy rate.
Notably, multifamily developers are actively advancing numerous projects into the construction pipeline, with an impressive count of nearly 5,900 units currently undergoing construction.
Over the course of the second quarter, the local vacancy rate demonstrated a positive trend by diminishing 30 basis points, culminating at a rate of 3.7 percent. This represents a significant year-over-year improvement of 60 basis points. Notably, this decline in vacancy has been consistent over the last three quarters, indicating a sustained positive trajectory.
The trajectory of apartment rents in San Diego has exhibited rapid growth in recent periods, although the momentum of this expansion eased slightly in the second quarter. Within the past three months, asking rents registered a 2.2 percent increase, reaching an average of $2,275 per month. Over the span of 12 months, asking rents have surged by an impressive 19.5 percent.
Within the multifamily investment domain, the second quarter marked a surge in momentum, with sales activity gaining traction since the beginning of the year. The median sales price for 2022 to date climbed to $357,000 per unit, marking an 11 percent surge compared to the levels recorded in 2021. Simultaneously, cap rates experienced a marginal increase, averaging approximately 3.5 percent throughout the second quarter.
San Diego's dynamic economy, innovative ecosystem, and diverse industries create a fertile ground for commercial real estate investment. With opportunities in office spaces, industrial properties, retail centers, and multifamily residences, investors can tap into a market that offers potential for growth and stability.
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