Savills Studley Report San Diego office sector Q4 2018

Savills Studley Research San Diego

SUMMARYMarket Highlights

LEASING SLIDES LOWERFollowing a burst of activity in the third quarter, leasing dropped off a bit in the final three months of 2018. Leasing totaled just over 1.0 msf, down slightly from the prior quarter. Tenants leased more than 5.0 msf in the four most recent quarters.

AVAILABILITY RATE FLATThe region’s overall availability rate inched lower, dipping by 5 basis points, from 17.99% to 17.94%. The Class A availability rate fell by 32 basis points to 19.5%.

RENT RISESOverall asking rent ticked up by 1.6% to $33.32 ($2.78/sf). The Class A average rent increased by 2.5% to $38.33 ($3.11/sf). SALES UPOffice property sales during the first eleven months of 2018 totaled $2.5 billion, a 14.2% increase compared to the same period of 2017.

"Leasing activity cooled a bit in the fourth

quarter, but was within range of historical

averages. With very negligible construction

activity, even slightly subpar leasing volume

has drawn down availability in spots.”

Savills Studley Research

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Savills Studley Report | San Diego

Stable Market Conditions

San Diego’s overall economy and office market continued on a steady path of modest expansion during 2018. The region added 14,745 office-using jobs (a 4.6% increase) during the last 12 months – well above the 2.2% increase in the prior 12 months locally. San Diego continues to benefit from the movement of larger tech firms from higher-cost markets.

Finding tech talent is the paramount concern for corporate innovators across the U.S.. Apple plans to expand across multiple U.S. markets, including San Diego, while also adding hundreds of jobs in Boulder, New York and Pittsburgh. The company said that it will invest $30 billion domestically, utilizing funds that resulted from the 2017 corporate tax reform act. The Cupertino-based heavyweight plans to eventually ramp up its local presence to 1,000 employees and reportedly plans to move to a new building on Towne Centre Drive in the University City area.

Venture capital remains active in San Diego. Since the start of 2017, about $1.6 billion in life science venture capital has been placed in San Diego companies. Locally-based tech and life science/biotech firms are growing. FICO (formerly known as Fair, Isaac and Company) signed a 80,475-sf lease on Valley Center Drive in North Cities. The data analytics firm extended its lease from 2020 to 2027.

Tight Conditions in Spots

With leasing activity relatively restrained, and negligible new construction, availability rates have stabilized. San Diego ended 2018 with an availability rate of 17.9%, down by only 10 basis points from the prior quarter. Availability rates are all over the map, though, ranging from 17.9% in North Cities to well over 20% in the Hwy 78 Corridor. The supply of larger quality big blocks of space is limited in core submarkets. There are roughly 20 class A buildings offering a block of 50,000 sf or more. The buildings are scattered across the region with only one such option in Torrey Pines and two each in UTC and Del Mar Heights.

Conditions are even more challenging for life science/biotech and creative sector companies. Startups face difficulty finding lab space in core areas. Creative office space is also at a premium. A couple of projects are underway, but with little space remaining for lease the development pipeline will do little to alleviate the shortage. Alexandria Real Estate Equities' Gradlabs in

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-12%

-9%

-6%

-3%

0%

3%

6%

0.26

0.28

0.30

0.32

0.34

0.36Millions

SDO. Office Emp. SDO.(% Annual Change) U.S. (% Annual Change)

Office-Using Employment Trends

$3.19

$2.75

$2.36$2.26

$0.00

$1.00

$2.00

$3.00

$4.00

Q4 '18Q4 '17Q4 '16Q4 '15Q4 '14Q4 '13

Rental Rate Trends

Class A Class B & C

Asking Rent Trends ($/sf)

19.5%

18.2%16.6%

20.8%

0%

5%

10%

15%

20%

25%

Q4 '18Q4 '17Q4 '16Q4 '15Q4 '14Q4 '13

Availability Rate Trends

Class A Class B & C

Availability Rate Trends

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Q4 2018

Tenant Sq Feet Address Market AreaFICO 80,475 Valley Center Dr North CitiesSamumed 71,390 9360 Towne Centre Dr Central SuburbanACADIA Pharmaceuticals 67,020 3745 Paseo Place North CitiesIntercept 47,000 4760 Eastgate Mall North CitiesSpaces 46,102 1420 Kettner Blvd DowntownWeWork 43,032 8910 University Center Lane North CitiesBioatla LLC 22,550 11085 Torreyana Rd North CitiesCentury 21 Award 20,345 7976 Hazard Center Dr Central SuburbanGuaton-Pato Technology 19,131 402 W Broadway DowntownCarrier Johnson 18,354 185 W F St Downtown

Sum of Leases 435,399

UTC targets biotech companies that are just graduating from the incubator. The 113,721-sf R&D building scheduled to deliver in late 2019, will offer move-in ready suites. Alexandria will also provide its package of services including an analytical lab, AV-equipped conference rooms, training rooms and an on-site vivarium. More life sciences and logistics firms are embracing the open, amenity-laden wellness revolution in space design. Some flex/logistics buildings are also incorporating amenities and comfort/wellness features such as open skylights. This includes Pacifica Group's create at Carlsbad Oaks North. The flex building still has nearly 150,000 sf of flex space available for lease.

Overall average asking rent rose by 2.5% to $38.33 ($3.19/sf) in the quarter. Rent growth has intensified a bit in Torrey Pines and Del Mar Heights, with rent pushing into the mid-$40/sf range. In comparison, new lab/R&D space is nudging up against $60/NNN. Life science firms have been a consistent source of demand in the last several quarters. During the fourth quarter, pharmaceutical firm Intercept signed a 47,000-sf lease at Irvine Company's 9779 Towne Centre Drive in UTC. Additionally, Acadia Pharmaceuticals leased 67,020 sf at 3745 Paseo Place in North Cities.

Super Block – The Next Big Thing

San Diego did not make Amazon’s shortlist. A lack of public transportation and a smaller and very tight labor market may have been hurdles. Several area developers are making a bid nevertheless to land the big whale – either a top local tenant or a significant corporate relocation. The SuperBlock@I.D.E.A District is Navarra Development’s vision for the multi-phase redevelopment of a 2.75-acre block in the East Village. Phase One calls for the $25- million conversion of two former Jerome’s Furniture warehouse into a 100,000-sf creative office building. The complex will feature massive 50,000-sf floorplates that are sure to appeal to the largest tech firms. Navarra plans to construct a 17-story, 450,000 sf tower on the adjacent site as part of Phase Two. The developer converted the former Coliseum Building into Punch Bowl Social. The 24,000-sf former boxing gym houses a restaurant, eight bowling lanes, karaoke rooms and a variety of other games.

Investors Target Coworking & Creative Office

Coworking continued its growth in San Diego. Spaces leased 46,102 sf at 1420

Kettner Boulevard in Downtown San Diego. Coworking is going institutional in many markets across the U.S., including San Diego. TH Real Estate paid $28.4 million ($410/sf) for The Yard in Sorrento Mesa. The Nuveen affiliate acquired a 60,000-sf building that was repurposed as creative office space. The project taps into one of the region’s best resources- its amazing climate. Oversized glass roll-up doors allow natural light to flow into the space. The Yard features other unique amenities such as electric vehicle-charging stations and a tenant electric-bicycle program. In November, Crown & Realty Development paid $20.4 million for The Oberlin. The 62,000-sf creative office campus in Sorrento Mesa, was converted by the seller, Bixby, from flex to creative office space. Of note, TH Real Estate also recently acquired 10222 Barnes Canyon in Sorrento Mesa for $43.2 million. The 81,976-sf life sciences building was 100% leased at time of sale.

Irvine Company Expands Holdings

Investment activity in San Diego remains

robust. A few investors are clearly making a big push in the market. The Irvine Company continued adding to its local portfolio, paying $73.3 million ($635/sf) for One Del Mar (12544 High Bluff Drive) in Del Mar. The seller, Clarion Partners, spent extensively on amenities adding a new fitness center, outdoor patios, lounge areas and an open air terrace. The Irvine Company plans to finetune some of the common areas including enhancing its “gathering experience.” The 115,376-sf building was approximately two-thirds leased at time of sale. Irvine Companies has added nearly 1.0 msf to its San Diego portfolio in 2018.

Lab and life science ready buildings continue to command even stronger pricing than traditional office buildings. Boston-based Longfellow Partners paid $112 million ($351/sf) for 12 buildings totaling 318,969 sf along Sorrento Valley Road.

Availability Rate Comparison Rental Rate Comparison ($/sf)

Major Transactions

$3.24

$2.89

$2.78

$2.65

$2.64

$2.54

$2.44

$1.78

$1.71

$0 $1 $1 $2 $2 $3 $4

North Cities

US Index

San Diego

Downtown

I-15 Corridor

Central Suburban

North County West

Hwy 78 Corridor

South/Southeast Corridor

4.7%

14.4%

17.9%

17.9%

17.9%

18.8%

20.3%

22.0%

23.8%

0% 5% 10% 15% 20% 25%

South/Southeast Corridor

Central Suburban

North Cities

US Index

San Diego

Downtown

I-15 Corridor

Hwy 78 Corridor

North County West

Savills Studley Report | San Diego

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Map Submarket Total

SF(1000's)

Last12 Months

Net Absorp Last 12

Mos.

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Central Suburban 14,008 1,205 400 2,013 4.6% 1,996 14.4% 0.6% 14.3% $2.54 0.5% $2.35Central Suburban - Class A 4,424 496 72 1,003 5.6% 885 22.7% 1.2% 20.0% $2.88 -0.1% $2.57Downtown 11,824 824 637 2,229 -3.3% 2,213 18.8% -0.6% 18.9% $2.65 0.8% $2.50Downtown - Class A 6,720 536 -79 970 -5.8% 896 14.4% -0.9% 13.3% $3.06 2.9% $2.85Hwy 78 Corridor 1,222 93 60 269 2.7% 158 22.0% 0.6% 12.9% $1.78 -4.1% $2.01Hwy 78 Corridor - Class A 545 73 62 55 26.5% 43 10.1% 2.1% 7.9% $2.41 4.0% $2.30I-15 Corridor 7,020 586 -55 1,425 8.0% 1,489 20.3% 1.5% 21.1% $2.64 3.2% $2.52

I-15 Corridor - Class A 3,395 335 -234 807 -7.6% 1,009 23.8% -2.0% 29.7% $2.83 8.3% $2.65

North Cities 21,267 2,550 89 3,804 -3.3% 4,235 17.9% -0.6% 19.9% $3.24 3.0% $3.05North Cities - Class A 11,641 1,537 121 2,274 -2.0% 2,461 19.5% -0.4% 21.1% $3.67 2.2% $3.43North County West 6,086 436 28 1,451 -1.3% 1,571 23.8% -0.3% 25.8% $2.44 0.9% $2.48North County West - Class A 1,871 257 -2 489 6.1% 575 26.1% 1.5% 30.7% $2.60 0.6% $2.63South/Southeast Corridor 1,296 12 23 61 -13.0% 18 4.7% -0.7% 1.4% $1.71 -1.4% $1.73South/Southeast Corridor -Class A 169 6 0 13 -44.7% 6 7.9% -6.4% 3.5% $2.32 2.9% $2.25San Diego Region TOTAL 62,722 5,013 1,181 11,251 -0.3% 11,680 17.9% -0.1% 18.6% $2.78 1.6% $2.69San Diego Region TOTAL - Class A 28,766 2,540 -61 5,612 -1.6% 5,875 19.5% -0.3% 20.4% $3.19 2.5% $3.04

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LeasingActivity

AvailableSF

Availabilityrate

Asking rentsPer SF

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(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

Savills Studley3579 Valley Centre DriveSuite 100San Diego, CA 92130(858) 793-8600

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Branch ManagerMichael Labelle,Senior Vice Presidentmlabelle@savills-studley.comLicense 00905261