REAL ESTATE NEWS

Office redevelopment continues to accelerate in the San Diego market, according to a new report from JLL.

Properties throughout San Diego County are being repurposed for residential redevelopment, among other asset types. Since 2014, a total of 9.2 million square feet of office supply has been removed through demolitions and conversions, with the redevelopment buildings outpacing new deliveries.

Richard Gonor, managing director of JLL, has represented San Diego property owners for over 25 years. He tells GlobeSt.com that the scale of office redevelopment today reflects the natural evolution of the market responding to fundamental workplace shifts.

JLL reports that 134 office properties have been redeveloped since 2014, with an average size of 66,000 square feet. Demolitions and conversions are expected to increase to a total of 12.6 million square feet by 2027.

As a result, the total supply is forecast to decrease by 4.4 million square feet from 2021’s peak.

“The velocity has been remarkable even by historical standards,” Gonor said.

“What we're witnessing is actually a healthy market correction where obsolete Class B and C office buildings are finding their highest and best use as residential, lab, and mixed-use developments, particularly in submarkets like Downtown, Sorrento Mesa, and UTC.”

He said these conversions have been a lifeline for many property owners because, without this redevelopment activity, San Diego would have a 20.6% vacancy rate instead of the current 13.9%.

“That rate would create a market environment that would have been devastating for asset values,” he said.

“The geographic concentration of these projects has actually strengthened remaining office assets by removing competing obsolete inventory and allowing quality properties to command premium rents in a more balanced supply-demand environment.”

While tenant downsizing continues to challenge the market with average lease sizes dropping 23% from pre-pandemic levels, the removal of functionally obsolete buildings is positioning San Diego's office market for long-term sustainability by concentrating demand in modern, amenitized Class A properties that meet today's workplace standards, according to Gonor.

Excess inventory is looming, given that nearly 40 million square feet of tenant leases are expiring by 2030. Coupled with tenant downsizing, availability inventory will most likely increase despite the velocity of conversions taking place, according to the report.

Office leasing activity during the past 18 months shows that tenants are reducing their footprints by 23% compared to pre-pandemic averages.

“I expect this redevelopment trend to accelerate over the next five years, further ensuring that our market continues this healthy evolution while creating sustainable value for property owners and addressing San Diego's broader housing and commercial needs," Gonor noted.

This activity on office transformations has increased property values, employment and expanded housing supply, according to JLL. In fact, projects over the past five years have supported 4,700 jobs across construction, design, engineering, architecture and related industries.

Approximately 3,800 new housing units have been formed through office conversions and redevelopment between 2020 and today.

Additionally, San Diego developers can exceed normal zoning density limits by receiving density bonuses when a percentage of residential units are designated as affordable housing.

Source: GlobeSt/ALM