MARKET TRENDS

In the dynamic landscape of San Diego’s real estate market, availability rates have reached unprecedented highs, surpassing 19% at the close of the year, marking a historical milestone at 19.5% in the fourth quarter. Notably, leasing activity has undergone a substantial decline, plummeting over 35% year-over-year to a 15-year low, recording just 1 million square feet.

CHALLENGES IN THE OFFICE MARKET

The office market grapples with challenges, characterized by record-high vacancies and availabilities. Despite these obstacles, San Diego County is poised to welcome its largest influx of new inventory, totaling almost 4.5 million square feet, with nearly 90% of the pipeline yet to secure commitments, set for delivery early next year.

IMPACT OF ECONOMIC INSTABILITY

Economic instability and the surge in interest rates since the previous year have resulted in historically low sales levels in 2023. Transaction volume stands at a mere 2 million square feet, representing a staggering 60% drop compared to the 5.5 million square feet recorded in 2022.

ECONOMIC OVERVIEW

The unemployment rate in San Diego County was 4.2% in November, exceeding the year-ago estimate of 3.3%, with no change month-over-month. Job additions from October to November totaled 7,500. In comparison, California reported an unadjusted unemployment rate of 4.9%, and the national rate was 3.5% during the same period.

Job gains were notable in trade, transportation, and utilities, contributing an increase of 4,400 jobs, while seasonal hiring in retail trade saw a rise of 3,600 jobs. On a year-over-year basis, the professional and business services industry experienced the most significant job reductions, with a decline of 6,600 jobs from November 2022 to November 2023.

LOOKING AHEAD

The near-term outlook suggests an anticipated uptick in investor activity in the coming year. Investors may seize opportunities presented by properties transitioning to banks and defaulting, benefiting from discounted prices of office products. However, the market has yet to witness a surge in distressed sales due to rising interest rates and declining occupancy.

With a substantial amount of new supply entering the market, vacancies are expected to rise while demand experiences a slowdown. Caution among tenants is anticipated to persist, leading to continued downsizing of their footprints. Recent quarters have seen new lease sizes approximately 18% smaller than pre-pandemic levels, and this trend is expected to persist in the upcoming quarters.

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