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Office Rents Are Expected to Continue Their Climb in 2018

Renting office space in San Diego is getting pricier, with the amount of money landlords want climbing closer to or matching peaks reached prior to the recession, according to several brokers.

Newmark Knight Frank reported that office rents for the fourth quarter of 2017 for all classes of office space were up 3.8 percent, rising to $2.74 per square foot compared with $2.64 for the same period a year ago and about $2 a square foot in the fourth quarter of 2012.

“Across the board, we have just seen a continued growth in San Diego County,” said Chris High, senior marketing manager of Newmark Knight Frank, a commercial real estate agency. “I think we’re going to see a slow and steady increase. I don’t anticipate it spiking.”

Although figures varied somewhat among brokers, the consensus is that the trend will continue throughout 2018.

The brokerage firm of JLL, in its fourth quarter report, cited average rental rates of $2.72 per square foot.

“Rates are pretty much at or around all-time highs for asking rates,” said Michael Combs, research manager for CBRE, a commercial brokerage firm.

“The market’s pretty tight right now. There’s not a lot of available space,” he said. “In the past, really eight years, we haven’t seen office (space) getting built, relative to the size of our market. That has a lot to do with price increases.”

Landlords also are renovating older buildings from the 1970s or 1980s, allowing them to charge higher rents.

They’re adding windows, creating outdoor spaces and adding other amenities which companies demand as they compete for a limited workforce.

“It’s just updating the image and quality of vintage buildings,” said Tom Olson, a tenants service representative at JLL.

That’s particularly true downtown, but also happening in suburban submarkets such as Sorrento Mesa, Del Mar Heights and along the Interstate 5 corridor.

For example, High said The Del Mar Corporate Plaza just finished a multimillion dollar renovation, which allowed the owner to raise rates from the low $3 to the low $4.

“In general, that market is a perfect example of an older, vintage product getting in position to compete with the new vintage market,” High said.

The upward pressure in office rents has led some companies to move from Class A to less expensive Class B space, where rents average 24 percent less than in Class A buildings, according to a JLL report on the fourth quarter of 2017.

Also fueling the rise in office rental rates is a vacancy rate which is flat or slightly down.

Newmark Knight Frank also reported that the absorption rate — which measures how much space is occupied by companies moving in verses companies moving out — was a positive 769,797 square feet for all of 2017, nearly 80 percent of which was for Class B office space.

The low vacancy rate is due in part to reluctance by some developers to commit to new construction projects on speculation, according to Newmark Knight Frank.

“While new construction has been well received, many developers are cautious and are not breaking ground until substantial pre-leasing activity is in place,” the agency reported. “Of the few projects under construction, 44.6 percent was pre-leased by year-end 2017.”

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