San Diego’s Office Sales, Prices Decelerate

San Diego’s office sector continued to perform well for completions and projects underway, according to CommercialEdge data. In terms of pipeline, two of the largest developments under construction in the metro are life science projects, as interest in this asset type continues to be one of the main drivers for the local economy.

Both investment volume and average sale price per square foot saw decreases at the end of the third quarter. Meanwhile, some significant office leases closed through the first nine months of the year, despite the heightened vacancy rate, as has been the case in most markets.

With office-to-residential conversions emerging as a trend across the country, CommercialEdge’s new tool, The Conversion Feasibility Index, is designed to highlight and evaluate which markets have strong repurposing fundamentals. While San Diego is not among the nation’s top markets for residential transformations, multiple Western markets have a percentage conversion potential between 15 to 20 percent and higher.

San Diego’s pipeline on the national podium

San Diego’s office sector had nearly 4.1 million square feet of space under construction spread across properties—the third largest pipeline among the best-performing markets in the U.S., only trailing San Francisco (4.7 million square feet) and Boston (11.6 million square feet).

The figure represents 4.2 percent of total stock, well above the national average of 1.0 percent and second after Boston’s 4.6 percent rate. When adding office projects in planning stages, San Diego’s share reached 6.8 percent.

Notable office projects underway include a 426,927-square-foot development at 4135 Campus Point Court, in the metro’s Torrey Pines submarket. Scheduled to come online by the end of 2025, the life science project is developed by Alexandria Real Estate Equities as part of its 2 million-square-foot Alexandria Point campus and is fully preleased by Bristol-Myers Squibb Co.

Another notable development is Bioterra, a 315,997-square-foot life science project at 5889 Oberlin Drive, within the University City submarket. With Longfellow Real Estate Partners as developer, the project broke ground in 2022 and is financed by a $165 million construction loan held by Bank OZK.

Developers delivered approximately 2.7 million square feet of office space across 12 properties, while construction starts included 1.2 million square feet across nine office projects. One of the significant completions in the metro was IQHQ’s Research and Development District, the first urban life science waterfront development in San Diego. RaDD’s The Rise (729,903 square feet), The Vida (396,154 square feet) and The Core (269,341 square feet) all came online in March.

Investment activity follows national pattern

Year-to-date through September, San Diego’s office sector saw $447 million in investments, with 26 properties totaling 2.1 million square feet having changed hands.

Significant office deals in San Diego included the $45.7 million sale of Symphony Towers, a 530,000-square-foot office asset in East San Diego. Originally completed in 1990, the Class A high-rise was purchased in September by Formosa. Irvine Co. sold the property, the second tallest skyscraper in the city, after more than 21 years of ownership.

The Hazard Center Office Tower also changed hands. The 268,645-square-foot office mid-rise was purchased by BH Properties for $40.3 million. Principal Real Estate Investors sold the 15-story building that previously traded in 2003.

Office properties traded at an average sale price of $196 per square foot, above the national average of $171 per square foot. The figure saw a significant drop since the $422 per square foot recorded at the end of May.

Across Western markets, Los Angeles led ($320 per square foot) and was followed by the Bay Area ($279 per square foot) and San Francisco ($268 per square foot). Only Phoenix ($174 per square foot), Portland ($132 per square foot) and Denver ($103 per square foot) recorded lower average sale prices when compared to San Diego.

Office vacancy rate keeps climbing

San Diego’s office vacancy rate reached 18.5 percent in September, below the national rate of 19.5 percent. The figure fluctuated from the 17.2 percent recorded in January, showing a consistent increase at 18.5 percent in May and at 19.1 percent in August. However, across similar markets, San Diego fared better than Austin (27.8 percent), Houston (25.2 percent), Denver (24.7 percent) and Portland (19.9 percent).

The asking rent prices in the metro averaged at $43.04 per square foot, on par with Los Angeles and outperforming the national average of $32.89 per square foot. Across similar markets, the Bay Area led with $54.74 per square foot, while San Diego was pricier than Denver ($30.79 per square foot), Houston ($30.14 per square foot) and Phoenix ($28.17 per square foot).

Significant office leases closed since the start of the year included Pfizer Oncology’s 230,000-square-foot deal at Torrey View, a life science project developed by Breakthrough Properties, a joint venture of Tishman Speyer and Bellco Capital. The tenant will occupy two of the three buildings at the 520,000-square-foot campus.

In June, Alexandria Real Estate Equities landed a 127,300-square-foot long-term agreement at its SD Tech by Alexandria Mega Campus in the Sorrento Mesa submarket. The tenant is a top-20 pharmaceutical company which signed a 10-year commitment at a 253,000-square-foot life science building, currently underway.

One month later, Lincoln Property Co. renewed the 134,000-square-foot, full-building lease with Charter Communications at Pacific Corporate Center, a two-story office property in the same submarket.

Coworking sector keeps steady

There were 2.1 million square feet of shared office space in San Diego as of September, on par with Nashville but more than in Austin (1.7 million square feet), Charlotte (1.5 million square feet) and Orlando (1.3 million square feet).

The rate of coworking space as percentage of total leasable office space stood at 2.1 percent, higher than the national average of 1.9 percent and outperforming Houston and Phoenix, both with 1.8 percent.

The flex office provider with the largest coworking footprint in San Diego remained Regus, leading with 299,162 square feet of space. The company was followed by Gateway Labs by Lilly (218,742 square feet), Premier Workspaces (122,948 square feet) and WeWork (105,282 square feet).