Real Estate Market Review

San Diego Office

3rd Quarter

2017

A diverse employment base combined with a well-educated workforce and tepid development have set the San Diego office market on firm footing. San Diego’s Scripps Ranch and UTC submarkets highlight the market’s innovative foundation, with Downtown trying to establish itself as the home for the next wave of start-ups. Tightening vacancies, limited sublet space, a lack of wide-scale development, and steady rent growth have contributed to the confidence of investors who continue to find a market with average yields more favorable than in the apartment sector. Downtown has been a favorite target of institutional capital this year with a number of big properties trading hands.

3rd Quarter 2017 | 1

The San Diego Office market finished the third quarter with strong leasing activity and increasing rental rates. The total vacancy rate in the overall San Diego market is 10.6%, a decrease from last quarter’s rate of 11% and down 90 basis points year-over-year. The San Diego County unemployment rate sits at 4.7%, below the year-ago estimate of 4.9% and well below the unadjusted unemployment rate of 5.4% for California and slightly higher than the rate of 4.5% for the nation.

Net absorption for Class A space this quarter was approximately negative 42,000 square feet, in spite of over 600,000 square feet of leasing activity. Class B office space total vacancy stayed steady at 11.2% from the same percentage last quarter, but a significant decrease from the vacancy posted 12.9% the same time last year. Office lease rates for Class A average $3.23 per square foot on a full service basis across the San Diego market, an uptick from last

quarter’s $3.21. Users seeking Class A space pay a $0.78 per square foot premium over Class B space, on average.

The Class A and B office space markets experienced strong leasing activity of over 1.4 million square feet in the third quarter. Submarkets in San Diego with the highest vacancy rates include Carlsbad at 19% and Scripps Ranch at 18.5%. Total space available in the market increased to 14.7 million square feet, increasing total availability to 14.5% which is slightly above the year ago rate of 14.4%. Submarkets with the highest direct net absorption in the third quarter included Mission Valley at 102,000 square feet, Kearny Mesa at 97,000 square feet and UTC at 61,500 square feet.

Tenants remain focused on value, looking for real estate opportunities to increase employee engagement, provide access to amenities

Market Forecast Trends

Forcepoint 10240 Sorrento Valley Rd., Sorrento Valley 64,117 s.f. leased (renewal)

Palomar Health 2125 Citracado Pky, Escondido 51, 400 s.f. leased

AutoAnything 6602 Convoy Ct., Kearny Mesa 41,422 s.f. leased (renewal)

Tsunami ARVR 3430 Carmel Mountain Rd., Del Mar Heights/Carmel Valley 32,475 s.f. leased

Kellermeyer Bergensons Services, LLC 3605 Ocean Ranch Blvd., Oceanside 25,010 s.f. leased

Notable Lease Transactions

ABSORPTION

RENTAL RATE

VACANCY

CONSTRUCTION DELIVERIES

2 | San Diego Office Real Estate Market Review

and positively impact employee recruitment. This has led to the growing trend of renovating older buildings and building out creative office upgrades. While the trend toward creative office space is in full swing, leasing hasn’t quite caught up yet. The vacancy rate sits near 20% in this product type, more than twice the metro rate and one reason could be cost. These spaces cost $.20/SF more than typical San Diego office space. Another reason could be location where the most sizable additions in this inventory are located north of Downtown. The former Union-Tribune buildings in Mission Valley

are among the latest to begin renovation as they’re converted into creative office use. Space is presently averaging 20 months on the market in this space type before it is leased, compared with less than 10 months for the balance of office space (which is below the five-year average). Overall office fundamentals are solid, even if creative space is having a more challenging time in finding tenants, further evidence being the amount of available sublet space - almost 10% below the five-year trend.

Data Source: CoStar

SubmarketTotal

Inventory

Direct Vacancy

Rate

Sublet Vacancy

Rate

Total Vacancy

Rate

Total Available

Rate

Q3 Direct Net Absorption

YTD Direct Net Absorption

Q3 Leasing Activity

YTD Leasing Activity

Avg Direct Rental

Rate (FS)

Carlsbad 6,317,707 18.1% 0.8% 19.0% 26.3% (11,274) 77,507 119,683 375,373 $2.45

Escondido 1,630,112 10.0% 0.1% 10.1% 11.7% (27,177) (29,218) 105,082 136,156 $1.85

Oceanside 1,356,830 9.1% 0.0% 9.1% 13.1% 36,985 56,292 20,163 78,880 $1.86

San Marcos 1,375,278 9.1% 0.0% 9.1% 9.7% 39,500 43,359 4,057 29,152 $2.34

Vista 1,220,084 17.9% 0.0% 17.9% 18.8% 6,904 (26,347) 11,185 106,751 $1.85

North County 11,900,011 14.9% 0.5% 15.4% 20.1% 44,938 121,593 260,170 726,312 $2.23

Poway 1,324,065 6.6% 0.0% 6.6% 8.9% (15,005) (27,616) 10,245 31,148 $2.19

Rancho Bernardo 6,991,432 8.8% 2.2% 11.0% 16.2% (157,094) (214,265) 68,039 218,186 $2.70

Scripps Ranch 2,715,218 17.1% 1.4% 18.5% 19.8% (99,570) (253,034) 56,201 211,280 $2.34

I-15 Corridor 11,030,715 10.6% 1.7% 12.3% 16.2% (271,669) (494,915) 134,485 460,614 $2.55

Del Mar Heights/Carmel Valley 4,754,750 15.3% 1.8% 17.0% 22.1% 37,647 30,201 132,995 288,683 $4.04

Governor Park 890,555 8.2% 0.4% 8.6% 10.8% 7,151 (15,388) 6,534 39,968 $2.71

La Jolla 1,404,107 7.5% 0.7% 8.2% 11.1% 5,589 (56,513) 19,434 75,264 $3.29

Miramar 1,610,914 9.1% 0.1% 9.2% 12.1% 13,299 (11,165) 44,530 103,539 $1.86

North Beach Cities 2,343,795 5.2% 0.3% 5.5% 8.7% (7,552) (16,440) 40,427 115,370 $3.46

Sorrento Mesa 9,497,795 11.5% 0.7% 12.2% 15.2% 18,182 49,863 124,526 370,850 $2.78

Sorrento Valley 838,908 7.5% 0.6% 8.1% 15.9% 10,284 12,847 74,205 122,072 $2.10

Torrey Pines 2,511,334 3.4% 0.0% 3.4% 2.8% (2,281) 6,991 8,561 35,263 $3.63

UTC 8,247,225 11.3% 2.3% 13.6% 20.1% 61,589 (447,771) 155,012 695,639 $3.47

North Cities 32,099,383 10.4% 1.1% 11.6% 15.6% 143,908 (447,375) 606,224 1,846,648 $3.22

Kearny Mesa 10,612,199 5.7% 0.5% 6.2% 9.4% 97,152 271,923 122,650 333,556 $2.21

Mission Gorge 554,826 4.8% 0.0% 4.8% 4.8% 2,658 13,636 1,740 3,730 $1.16

Mission Valley 7,093,362 8.9% 0.5% 9.4% 15.1% 102,376 111,673 124,870 589,490 $2.50

Old Town/Sports Arena/Pt. Loma 2,099,739 5.3% 0.1% 5.4% 7.5% 9,425 25,745 10,301 76,080 $2.39

PB/Rose Canyon/Morena 1,202,150 3.5% 0.0% 3.5% 6.2% 2,091 10,414 10,162 43,821 $1.78

Central Suburban 21,562,276 6.6% 0.4% 7.0% 10.8% 213,702 433,391 269,723 1,046,677 $2.27

College Area 1,058,511 3.2% 0.0% 3.2% 4.6% (1,039) 14,424 3,330 22,488 $2.18

East County 3,604,758 3.8% 0.0% 3.8% 4.7% (16,222) (6,277) 27,130 61,538 $1.76

East County 4,663,269 3.7% 0.0% 3.7% 4.6% (17,261) 8,147 30,460 84,026 $1.86

Park East 155,884 1.0% 3.1% 4.0% 4.0% (750) (1,500) 0 0 -

Uptown East 103,941 0.0% 0.0% 0.0% 0.0% 0 0 0 0 -

Uptown West/Park West 2,522,214 6.4% 0.4% 6.8% 8.1% (4,729) 29,061 31,262 87,575 $2.55

Uptown 2,782,039 5.9% 0.5% 6.4% 7.6% (5,479) 27,561 31,262 87,575 $2.31

Downtown 12,929,636 11.6% 0.4% 12.0% 18.0% (116,886) 173,057 213,713 616,780 $2.59

Chula Vista 2,923,117 9.0% 0.3% 9.3% 11.5% 486 28,938 21,102 72,114 $2.52

Coronado 124,831 13.9% 0.0% 13.9% 13.9% 0 (5,788) 0 0 $3.00

National City 508,388 9.1% 0.0% 9.1% 1.0% 2,021 20,787 1,006 57,236 $2.09

Otay Mesa 231,650 6.7% 0.0% 6.7% 6.7% (3,270) 123 1,016 6,190 $2.08

San Ysidro/Imperial Beach 86,354 0.0% 0.0% 0.0% 0.0% 0 0 0 0 -

Southeast San Diego 381,826 16.7% 0.0% 16.7% 16.7% (3,000) (6,300) 0 0 $2.20

South County 4,256,166 9.5% 0.2% 9.7% 10.3% (3,763) 37,760 23,124 135,540 $2.29

Class A 35,262,093 10.2% 1.4% 11.7% 16.5% (41,821) (141,307) 612,497 1,869,508 $3.23

Class B 51,207,566 10.7% 0.5% 11.2% 15.0% 49,288 (16,369) 813,644 2,580,351 $2.45

Class C 14,753,836 5.9% 0.1% 6.0% 7.8% (19,977) 16,895 143,020 554,313 $1.87

San Diego County Total 101,223,495 9.8% 0.8% 10.6% 14.5% (12,510) (140,781) 1,569,161 5,004,172 $2.67

Area ReviewSubmarket Statistics

3rd Quarter 2017 | 3kiddermathews.com

FORECAST

Vacancy

2Q171Q174Q163Q162Q161Q164Q153Q15

Availability

4Q17 2Q181Q183Q178%

10%

12%

14%

16%

18%

VACANCY VS AVAILABILITY

Average Sales Price (PSF)

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

3Q17

Cap Rate

$0

$100

$200

$300

$400

2%

4%

6%

10%

8%

AVERAGE SALES PRICE & CAPITALIZATION RATES

1Q17 2Q174Q163Q162Q161Q164Q153Q15

Class B

FORECAST

Class A

3Q17 4Q17 2Q181Q18

Total

$2.00

$2.50

$3.00

$3.50

ASKING LEASE RATE

Vacancy

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

3Q17

Asking Lease Rate (PSF)

5%

10%

15%

20%

$1.50

$20.00

$2.50

$3.00

VACANCY VS ASKING LEASE RATE

Net Absorption (SF)

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

3Q17

-1.5M

-1M

-500K

0

500K

1M

1.5M

2M

2.5M

3M

3.5M

4M

NET ABSORPTION - HISTORICAL

Net Absorption (SF)

2Q16 3Q161Q164Q153Q15 4Q16 1Q17 2Q17 3Q17-800K

-700K

-600K

-500K

-400K

-300K

-200K

-100K

0

100K

200K

300K

400K

500K

600K

NET ABSORPTION - QUARTERLY

4 | San Diego Office Real Estate Market Review

kiddermathews.com

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

Market Breakdown

Q3 2017 Q2 2017 Q3 2016 Annual % Change

Vacancy Rate 10.6% 11.0% 11.5% -7.83%

Availability Rate 14.5% 13.9% 14.4% 0.69%

Asking Lease Rate $2.67 $2.65 $2.57 3.89%

Leased SF 1,569,161 1,904,903 2,485,867 -36.88%

Sold SF 2,457,455 517,215 1,160,782 111.71%

Net Absorption 145 -624,861 436,884 N/A

Offices

Seattle206.296.9600

Bellevue425.454.7040

South Seattle206.248.7300

Tacoma253.722.1400

Olympia360.705.2800

Portland503.221.9900

San Francisco415.229.8888

Redwood Shores650.769.3600

Silicon Valley408.970.9400

Sacramento916.970.9700

Roseville916.751.3600

Los Angeles213.880.5250

Commerce323.727.1144

Long Beach562.472.0071

Orange County949.557.5000

Inland Empire909.764.6500

San Diego858.509.1200

Carlsbad760.430.1000

Reno775.301.1300

Phoenix602.513.5200

HISTORICAL NEW CONSTRUCTION & VACANCY RATE

SF

Vacancy RateNew Deliveries

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

3Q17

%

0

1M

2M

3M

4M

0%

10%

20%

5%

15%

New Deliveries

Vacancy Rate

HISTORICAL SALES ACTIVITY & MEDIAN SALES PRICE

SF

Median Price/Building SFTotal Square Feet of Sales

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

3Q17

$/SF

0

3M

6M

9M

12M

15M

$50

$100

$150

$200

$300

$250

Total Square Feet of Sales

Median Price/Building SF

HISTORICAL LEASING ACTIVITY & ASKING LEASE RATES

SF

Asking Lease RateLeasing Activity

2014

2015

2016

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

3Q17

$/SF

0

4M

8M

12M

$1.00

$1.75

$3.25

$2.50Leasing Activity

Asking Lease RateContactMark ReadExecutive VP, BrokerageSouthwest949.557.5000mread@kiddermathews.com

Designated Broker

Mark Read | LIC #00572743