MARKETVIEW San Diego Office, Q3 21 High sale volume as investors capitalize on hot office market Vacancy Rate Net Absorption Construction Lease Rate 13.4% 16,66 sq. ft. 337,3 sq. ft. $2.9 FSG Figure 1: Net Absorption vs. Asking Lease Rate 's SF Net Absorption Asking Rate (FSG) 1,2 6 4 2 (2) (4) There was 16,66 sq. ft. of positive net absorption in Q3 21. Although Class B product posted 136,91 sq. ft. of negative net absorption this quarter, it accounts for of the year-to-date overall net absorption of 39,327 sq. ft. Overall asking rates were $2.9, $.3 below the Q2 2 peak. CBRE Econometric Advisors forecasts asking rates to surpass this peak by Q1 216 Year-to-date sales volume of $2.3 billion has now surpassed 214 s total. Q3 21 was the highest dollar amount of sales since Q3 27. There were three deliveries totaling 73,4 sq. ft., this record amount is the highest since the recession. In addition, three buildings totaling 17,71 sq. ft. broke ground this quarter to bring construction activity to 337,3 sq. ft. While San Diego unemployment increased in Q3 21, it has improved 1 bps year-over-year. San Diego s Office Market continued to have many positive indicators in Q3 21. High sales volume, construction deliveries, increases in asking rates and positive net absorption resulted from economic growth. In Q3 21 there was over $1 billion in Office sales, this is the highest volume of sales since Q3 27. Year-to-date sales volume is over $2.3 billion; 21 has already surpassed 214 s total by nearly $3 million. Alexandria s purchase of Qualcomm s building at 129 Campus Point in UTC for $1 million was the quarter s largest single-building purchase. Alexandria plans on converting this office building into Lab product through extensive upgrades to make it suitable for Eli Lilly, who has already signed a lease for more than 1 years in conjunction with the purchase. *Arrows indicate change from previous quarter 4 1 2 3 21 211 212 213 214 21 Rate (FSG) $3. $2.7 $2. $2.2 $2. $1.7 $1. $1.2 $1. Source: CBRE Research, Q3 21. Q3 21 CBRE Research 21 CBRE, Inc. 1
42, jobs were added year-over-year, leading to a decrease of 1 basis points (bps) in San Diego s unemployment rate. Q3 21 unemployment was.1%, an increase of 2 bps quarter-over-quarter. Qualcomm announced it will be laying off approximately 1,3 employees in San Diego. Along with these layoffs Qualcomm will be vacating space in the near future. On a bright note, the first 27, sq. ft. that Qualcomm vacated has already been back-filled by Eli Lilly. In the next nine months, Qualcomm plans on vacating an additional 3, sq. ft. There is optimism that the multitude of highly-skilled engineers, who were laid off, will be employed by other innovative San Diego companies. This should help offset Qualcomm s impact on the Central San Diego Office market. The San Diego Military Advisory Council s recently released annual report shines a bright light on the future of San Diego. Defense spending currently supports 32, jobs or 22% of San Diego s job total. This figure was 2% of the total in 212; over those same three years 17, defense supported jobs were added. This points to the expansion of other industries such as life science, technology and an overall diversification of San Diego County. San Diego s overall asking rate rose 3.6% quarterover-quarter to $2.9, an increase of $.1 yearover-year. The current rate is only $.3 from the $2.62 peak seen in Q2 2. CBRE Econometric Advisors forecasts that peak pricing will be surpassed in Q1 216. All classes experienced quarter-over-quarter rate increases, but Class A was the clear leader with an increase of 4.% to $3.1; Class B and C both increased by 1.6%. UTC, the perennial leader, had the largest overall increase of $.32 or 1.% quarter-over-quarter to $3.3 primarily due to the delivery of prime office space at One La Jolla Center. Figure 2: Unemployment Rate 14% SD CA U.S. 12% 1% 6% 4% 211 212 213 214 21 Source: U.S. Bureau of Labor Statistics, Q3 21. Figure 3: Year-Over-Year Job Growth Jobs (M) # Employed Y-o-Y % Change Y-o-Y % 1. 4% 1.4 3% 2% 1.3 1% 1.2 % 211 212 213 214 21 Source: U.S. Bureau of Labor Statistics, Q3 21. Figure 4: Asking Lease Rate Rate (FSG) $3.4 A B C $3. $2.6 $2.2 $1. $1.4 211 212 213 214 21 Source: CBRE Research, Q3 21. Figure : Year-Over-Year Rent Growth Y-o-Y % 1% % % (%) (1%) (1%) 4 1 2 3 21 211 212 213 214 21 Source: CBRE Research, Q3 21. Q3 21 CBRE Research 21 CBRE, Inc. 2
While San Diego had positive net absorption, deliveries without significant pre-leasing forced vacancy up bps to 13.4% quarter-over-quarter. The San Diego Office Market posted 16,66 sq. ft. of positive net absorption in Q3 21. While this was a relatively flat quarter, it is the twentieth quarter of positive net absorption out of the last 24 and brings year-to-date net absorption to positive 39,327 sq. ft. Several mid-sized new deals were offset by Bridgepoint Education vacating nearly 1, sq. ft. in the 6 Corridor. Occupancy shifted from Class B to Class A this quarter primarily due to Sempra Energy vacating their old Class B headquarters and moving into a new Class A build-to-suit. Despite Class B s negative net absorption this quarter, it has posted 434,1 sq. ft. of positive net absorption year-to-date, accounting for more than of the year s overall total. Q3 21 saw the highest square footage delivered since 27 and three new projects broke ground. The new construction consists of another Class A 6,7-sq.-ft. build-to-suit for ViaSat in Carlsbad and a new 92,1-sq.-ft project in Del Mar Heights named Torrey Point. Torrey Point is comprised of two Class A buildings with Pacific Ocean and Torrey Reserve views. In Q3 21, the Office market saw three deliveries: the 32,-sq.-ft. Sempra Energy Headquarters in Downtown, the 36,-sq.-ft. One La Jolla Center in UTC and ViaSat s 77,4-sq.-ft. build-to-suit in Carlsbad. With a growing economy comes a pipeline of speculative development. One La Jolla Center was the first in the pipeline to be delivered and was about 2% pre-leased upon delivery. With more than one and a half million sq. ft. of proposed speculative office construction in Central San Diego at the moment, developers are very bullish on the future. Figure 6: Overall Vacancy Rate 1 16% 14% 12% 1% 211 212 213 214 21 Source: CBRE Research, Q3 21. Figure 7: Vacancy Rate by Class 23% A B C 1 13% 211 212 213 214 21 Source: CBRE Research, Q3 21. Figure : Net Absorption 's SF A B C () 211 212 213 214 21 Source: CBRE Research, Q3 21. Figure 9: Under Construction 's SF 6 4 2 211 212 213 214 21 Source: CBRE Research, Q3 21. Q3 21 CBRE Research 21 CBRE, Inc. 3
Figure 1: Market Statistics Region RBA Direct Vacancy % Overall Vacancy % Qtr Net Absorption Under Const. Const. Deliveries Asking Lease Rate ($/FSG) Central San Diego 46,2,466 11.7 12.6 (96,7) 231,74 36, 2. Downtown 12,24,42 16.3 16. (114,) 32, 2.44 East County 2,9,923.2. (67) 1.92 North County 1,174,663 1.3 1.9 137,79 9,933 77,4 2.2 South San Diego 2,37,37 13. 13.1 73,61 2.27 SW Riverside 3,136,42 11. 11. 17,17 16,12 1.1 San Diego Totals 76,22,692 12.7 13.4 16,66 337,3 73,4 2.9 Class A 2,61,372 13. 13.9 1,2 232,613 73,4 3.1 Class B 3,32,462 13. 14.1 (136,91) 1,19 2.3 Class C 12,21, 1.1 1.2 (1,64) 1.9 Source: CBRE Research, Q3 21. Figure 11: Key Lease Transactions Occupier Industry Sector Location Class Sq. Ft. Leased Northrop Grumman* Defense/Aerospace Rancho Bernardo B 16,72 Intel* Technology Scripps Ranch A 9,93 County of San Diego Government South San Diego B 4,97 Fairfield Properties* Professional Services Sorrento Mesa B 6,62 Regulus Therapeutics Life Science Torrey Pines A 9,24 renewals indicated by* Source: CBRE Research, Q3 21. Figure 12: Key Sales Transactions Property Buyer Location Total Price/Sq. Ft. RBA Lusk Mira Mesa Bus. Prk. John Hancock Sorrento Mesa $163.M / $33 37,64 Highlands Corporate Ctr. Blackstone Del Mar Heights $124.7M / $6 2,93 129 Campus Point Dr. Alexandria UTC $1. M / $34 34,326 Chancellor Park Blackstone UTC $14.9 M / $26 199,2 Sky Park Office Plaza Blackstone Kearny Mesa $3.4M / $262 23,476 Source: CBRE Research, Q3 21. Q3 21 CBRE Research 21 CBRE, Inc. 4
Camp Pendleton Marine Corps Base 76 7 Oceanside 4 1 2 3 MC 4 Clellan 1 2 3 7 4 1 2 3 4 1 2 3 4 1 2 Palomar Carlsbad 211 212 NORTH 213 1 214 21 North Beach Cities North Beach Cities La Jolla Vista Del Mar Heights Sorrento Valley Torrey Pines UTC Sorrento Mesa Governor Park San Marcos 6 PB/Rose Canyon/Morena 6 Corridor Miramar 2 163 SW RIVERSIDE 1 CENTRAL MCAS Miramar/ Mitscher Field 163 Kearny Mesa Mission Valley 1 Mission Gorge Escondido 1 Lake Hodges Rancho Bernardo/ Poway Scripps Ranch EAST 2 East County 12 67 San Vincente CONTACTS San Diego Research Department SanDiegoResearch@cbre.com Eric Walker Senior Research Analyst +1 46 464 Eric.Walker2@cbre.com Ally Dell Research Analyst +1 46 469 Alexandra.Dell@cbre.com Mark Fitzgerald San Diego Research Manager +1 646 47 Mark.Fitzgerald2@cbre.com Point Loma/ Sports Arena Old Town/ th Ave San Diego Intl- Lindbergh FLD DOWNTOWN 1 94 4 Sweetwater SOUTH 12 12 Lower Otay Jill Luna Manager, Southern California Research +1 949 72 69 Jill.Luna@cbre.com 9 MEXICO CBRE OFFICES San Diego Central Office 436 Executive Dr Suite 16 San Diego, CA 92121 Downtown San Diego Office 3 Tenth Ave Suite San Diego, CA 9211 To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway. North County Office 7 Fleet St Suite 1 Carlsbad, CA 92 Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.