TENANT OUTLOOK REPORT

WINTER 2015 | OFFICE

TENANT ADVISORY SERVICES

SAN DIEGO COUNTY

San Diegos Office Market Soars to Pre-Recession Heights

MARKET OVERVIEW

San Diegos office market had a banner year in 2014, totaling 1.72 million SF of net absorption. Countywide
office demand in Q4 totaled 487,000 SF an increase from 321,000 SF in Q3, causing the direct office
vacancy to drop to 11.5%.
North City West, consisting of Carmel Valley (7.4%), Sorrento Mesa (6%) and UTC (4.8%) continues to
flourish with a combined 6.1% direct Class A vacancy as compared to 7.3% in Q3 2014. Other tight Class
A office submarkets include Mission Valley (8.7%), Kearny Mesa (4.0%) and Rancho Bernardo (6.6%). As
a result of the record absorption, rental rates continue to increase. However opportunities can be found
in these submarkets with under the radar sublease space and also in the Class B office sector were the
difference between Class A and B rental rates can reach 30%.
In December 2014, San Diegos unemployment level fell from 5.8% to 5.2% the lowest in seven years.
Overall in 2014, the county added 44,500 jobs with hiring rising 3.3%. The job gains were led by healthcare
VACANCY BY SPACE TYPE
and the high-paying professional STEM fields (Science, Technology, Engineering, & Math). Health care
Q4 2014
Q3 2014 CHANGE
has become one of the largest job sectors in San Diego, employing more than 121,000 representing 9% of
the countys labor force. Venture Capital (VC) investment in startup companies remains high. According to
11.45%
12.01%
DIRECT

NEW SUPPLY, ABSORPTION AND VACANCY

HISTORICAL
RATE TRENDS
TheRATES
Money Tree Report, 99 local companies
raisedRENTAL
$805 million
in 2014 as compared to 99 firms raising
Class A & Overall Office Rates
0.79%
0.82%
SUBLEASE

$733
million
in
2013.
The
Top
Venture
Capital
deals
in
Q4
were
BioNano
Genomics ($22M), Suja Life
Quarterly
Average
Asking
Rate
Per
SF
Per
Month
(Full Service)
3.0
20%
12.24%
12.83%
TOTAL

($21M), DB Networks
($17M),
Cue
($7.5M)
and
StackIQ
($6M).
18%
$3.10
2.5

$3.00

16%
NET ABSORPTION
AND VACANCY $2.90
14%
The annual 2014 12%
Class B office segment$2.80
saw the most demand with 839,000 SF of net absorption. Class
1.5
$2.70
A
office
absorbed
740,000
SF
while
Class
C gained 138,000 SF. UTC (+554,000 SF), Kearny Mesa
1.0
10%
$2.60
(+313,000 SF) and
Carmel Valley (+192,000
SF) recorded the most positive net absorption in 2014. In
$2.50
8%
0.5
VACANCY
BY CLASS
2014 less than one-third
of
overall
demand
could
be attributed to new construction. This has been a
$2.40
6%
0.0
$2.30and the primary reason vacancy has dropped so steadily as
prevailing
trend
over
the
past
five
years
4%
CHANGE
Q4 2014
Q3 2014
demand has persistently
outpaced new $2.20
supply.
-0.5
2%
$2.10
12.27%
12.52%
CLASS A

In Rancho Bernardo,
131,000 SF as an owner/user. In UTC, Lytx relocated from
$2.00
-1.0
0% Scripps Health occupied
Q4 Q1
Q2 Q3 Q4 Q1
Q2 61,000
Q3 Q4 Q1 SF.
Q2 Q3In
Q4Downtown
Q1 Q2 Q3 Q4 (CBD),
Q1 Q2 Q3 AECOM
Q4
12.73%
2005 2006 13.76%
2007 2008 2009
2012 2013
CLASS B 2003 2004
2010 2011
Kearny
Mesa2014into 76,000 SF and ServiceNow
expanded
into
10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 14
consolidated their offices into 47,000 SF at 09
1 Columbia
Place. In the I-15 Corridor, Renovate America
11.04%
11.34%
CLASS C

Net Absorption
New Supply occupiedVacancy
24,000 SF and MIVA Networks took 23,000 SF. Class A
All Classes
The largest Q4 vacancies occurred when CareFusion vacated 116,000 SF in Sorrento Mesa; Raytheon
vacated 92,000 SF in Kearny Mesa and Gafcon vacated 33,000 SF in Downtown.
Countywide Class A ($3.00/SF) and Class B ($2.40/SF) average asking rental rates increased. For Class
A rates, Carmel Valley averaged $3.90/SF;
averaged
$3.50/SF;
Sorrento
Mesa averaged $3.25/SF;
OFFICEUTC
LEASING
ACTIVITY
BY TENANT
SIZE
OFFICE VACANCY RATES
of Total Leases
Completed
in Q4 2014
Mission Valley averaged $2.85/SF andPercentage
Downtown
(CBD)
averaged
$2.80/SF.
OFFICE VACANCY RATES
$ / SF / Month (FS)

SF (Millions)

Vacancy Rate

2.0

Q4 2014

Q4 2014

12.2%
12.3%

S.D. County

11.4%
11.1%

Suburban

18.4%
16.2%

Downtown
0%

5%
All Classes

10%

15%

20%

Class A

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LARGE TENANT ACTIVITY AND OPPORTUNITIES

9.4%
The largest signed lease transactions include:
a lease in Carmel Mountain
27.5% ICW (72,000 SF) signed
3.2%
Ranch; Caliber Home Loans (46,000 SF) signed a lease in Rancho Bernardo; In UTC, iboss purchased a
1.7%
<= 2,000
SF [273]
43,000 SF building in Campus Point for their future offices; Samsung (34,000
SF)
renewed
in Sorrento
Mesa; Chicago Title (20,000 SF) renewed in Mission Valley; Houzz (18,000 SF)2,001
will- open
up[129]
an office
5,000 SF
at DiamondView Tower next to Petco Park; Zogenix (17,000 SF) and Relational Advisors (16,000 SF)
5,001 - 10,000 SF [44]
renewed their leases in Carmel Valley.
10,001 - 20,000 SF [15]
Future CBD absorption may be affected by Landlords repurposing their office buildings to other product
>= SF
20,001
SF [8]
types such as the landlord at 625 Broadway who is planning to convert their 223,000
office
building into
residential units and Bosa Developments future plans for the 156,000 SF Paladion (the former American
Specialties Health HQ building) they acquired adjacent to Horton Plaza.
58.2%
NEW SUPPLY
Construction is underway in Sorrento Mesa on a major renovation of the 205,000 SF two-building Enclave
Sorrento project. In Carmel Valleys Torrey Reserve, American Assets has two buildings totaling 38,000
SF with completion in Q2 2015. Additionally, Kilroys The Heights Del Mar building will add 75,000 SF of
Class A office space in Q4 2015.
The Irvine Company One La Jolla Center in UTC, a 306,000 SF Class A office building is targeted for a
mid-2015 completion. Cisterras 320,000 SF build-to-suit office tower for Sempra Energy in Downtown
is expected to be completed in late-2015.
Finally, CRUZANs MAKE project in Carlsbad is undergoing a complete renovation of the former Floral

Trade Center into 177,000 SF of creative office space fronting the I-5 freeway.

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TENANT OUTLOOK REPORT

WINTER 2015 | OFFICE

TENANT ADVISORY SERVICES

SAN DIEGO COUNTY

OFFICE OVERVIEW
San Diego County Office Market
Q4 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

15.0%
20.4%
34.0%
17.5%

1.2%
0.4%
0.2%
0.9%

16.2%
20.8%
34.2%
18.4%

16.1%
20.9%
36.2%
18.5%

(4,238)
1,643
13,858
11,263

69,741
(9,269)
(60,753)
(281)

MISSION VALLEY
A
B
C
TOTAL

13
64
67
144

2,017,208
3,459,528
1,606,324
7,083,060

8.7%
10.9%
7.9%
9.6%

0.8%
0.3%
0.1%
0.4%

9.5%
11.2%
7.9%
10.0%

8.5%
10.4%
9.0%
9.5%

(20,429)
(29,394)
16,539
(33,284)

(41,216)
15,253
4,985
(20,978)

KEARNY MESA
A
B
C
TOTAL

15
106
91
212

1,858,959
5,226,307
1,876,082
8,961,348

4.0%
11.7%
16.3%
11.1%

0.2%
0.1%
0.0%
0.1%

4.2%
11.7%
16.3%
11.1%

4.4%
12.6%
17.2%
11.8%

2,576
44,135
16,740
63,451

44,861
202,012
66,456
313,329

UTC
A
B
C
TOTAL

21
12
6
39

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

4.8%
9.6%
1.4%
5.6%

0.5%
0.0%
0.0%
0.3%

5.2%
9.6%
1.4%
6.0%

5.5%
15.0%
3.1%
7.5%

9,988
60,411
5,447
75,846

473,800
73,539
6,873
554,212

SORRENTO MESA
A
B
C
TOTAL

23
51
42
116

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

6.0%
7.2%
9.7%
6.9%

3.1%
0.7%
0.0%
1.7%

9.1%
7.9%
9.7%
8.6%

9.1%
8.1%
9.4%
8.7%

CARMEL VALLEY
A
B
C
TOTAL

44
26
1
71

3,787,819
1,264,483
13,914
5,066,216

7.4%
15.6%
0.0%
9.4%

4.0%
0.8%
0.0%
3.2%

11.4%
16.3%
0.0%
12.6%

12.0%
17.0%
0.0%
13.2%

25,363
8,430
0
33,793

175,667
16,703
0
192,370

RANCHO BERNARDO
A
B
C
TOTAL

19
58
25
102

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

6.6%
7.2%
7.1%
6.9%

0.8%
0.0%
0.3%
0.4%

7.4%
7.2%
7.4%
7.3%

8.6%
13.5%
6.9%
10.9%

26,725
168,449
(2,206)
192,968

19,929
58,860
16,640
95,429

CARLSBAD
A
B
C
TOTAL

44
108
36
188

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

19.6%
13.2%
11.4%
15.4%

1.9%
1.1%
0.0%
1.3%

21.5%
14.3%
11.4%
16.7%

21.1%
16.0%
12.5%
17.5%

(7,267)
50,085
6,019
48,837

(14,389)
89,831
28,557
103,999

SAN DIEGO COUNTY OFFICE

A
271
B
973
C
1,145
2,389
TOTAL

31,061,696
35,495,570
15,456,522
82,013,788

10.8%
12.3%
10.9%
11.5%

1.5%
0.5%
0.2%
0.8%

12.3%
12.7%
11.0%
12.2%

12.5%
13.8%
11.3%
12.8%

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

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1,598
9,965
(3,213)
8,350

75,411
364,631
46,876
486,918

(66,049)
(20,402)
7,776
(78,675)

740,104
839,390
137,853
1,717,347

TENANT OUTLOOK REPORT | WINTER 2015 | 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
increased from a low of
$2.10/SF on a full service
gross basis. Q4 2014 was
the 12th consecutive quarter
where the rate has either
increased or remained flat
with the current rate of
$2.29/SF exhibiting a $0.02
increase during the quarter.
The Class A rate also posted
Q4 aQ1quarterly
Q2 Q3 Q4increase
Q1 Q2 Q3ofQ4
12 $0.03
13 13 to
13 $2.91/SF.
13 14 14 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

$ / SF / Month (FS)

Vacancy Rate

$ / SF / Month (FS)

$3.10
$3.00
$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
Q4 Q4
Q1 Q1
Q2 Q2
Q3 Q3
Q4 Q4
Q1 Q1
Q2 Q2
Q3 Q3
Q4 Q4
Q1 Q2 Q3
011 2012 2013 2014 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
09 12
10 13
10 13
10 13
10 13
11 14
11 14
11 14
11 14
12 12 12
09 10 10 10 10 11 11 11 11 12 12 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 Q4 2014

A total
of 469
leases
were
Percentage
of Total
Leases
Completed in Q4 2014
completed in Q4 2014. This
equated to a 25% decrease in
9.4%
9.4%
total leases compared to Q3
27.5%
27.5%will continue
3.2%
2014. Leasing
3.2%
to be strong in 2015, driving
1.7%
1.7%
<= 2,000 SF [273]
vacancy further downward.

billion in annual revenue

1.46

15,800 professionals

billion USD in total transaction value

Tenant Advisory Services

www.ColliersTAS.com
<= 2,000 SF [273]

2,001 - 5,000 SF [129]

2,001 - 5,000 SF [129]

5,001 - 10,000 SF [44]

5,001 - 10,000 SF [44]

10,001 - 20,000 SF [15]

10,001 - 20,000 SF [15]

>= 20,001 SF [8]

>= 20,001 SF [8]

> Only represent tenants in their

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

58.2%

58.2%

RON MILLER
Senior Director
Tenant Advisory
Services

Downtown

Kearny
Mesa

Class A

UTC

Sorrento
Mesa

Class B

Carmel
Valley

Rancho
Bernardo

Carlsbad

16.9
16.5
16.1

20.9
12.2
16.2

19.4
19.6
19.6

12.5
15.1
14.7

11.4
10.0
10.9

Mission
Valley

17.1
11.3
13.0

858.677.5363
LIC # 00874868

23.3
25.3
22.2
15.0
15.1

20.7

27
24
21
18
15
12
9
6
3
0

16.9
21.6
17.1

Months

OFFICE SPACE TIME-ON-THE-MARKET

Average Months by Submarket and Class

San Diego
County

All Classes

TIME ON MARKET
Time-on-the-market for Class A office space is averaging 16.9 months countywide.

www.ronmillersd.com
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
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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.

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