Tenant Outlook Report - Summer 2014

1. Colliers International | Accelerating success. | www.colliersTAS.com
TENANT OUTLOOK REPORT
SAN DIEGO COUNTY
SUMMMER 2014 | OFFICE
TENANT ADVISORY SERVICES
VACANCY BY SPACE TYPE
Q2 2014 Q1 2014 CHANGE
DIRECT 12.77% 12.90% 
SUBLEASE 0.63% 0.71% 
TOTAL 13.40% 13.61% 
VACANCY BY CLASS
Q2 2014 Q1 2014 CHANGE
CLASS A 13.24% 13.77% 
CLASS B 14.36% 14.15% 
CLASS C 11.50% 12.01% 
OFFICE VACANCY RATES
Q2 2014
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Q2
VacancyRate
SF(Millions)
Net Absorption New Supply Vacancy
NEW SUPPLY, ABSORPTION AND VACANCY RATES
17.9%
11.9%
13.2%
18.8%
12.6%
13.4%
0% 5% 10% 15% 20%
Downtown
Suburban
S.D. County
All Classes Class A
OFFICE VACANCY RATES
Q2 2014
60.2%
27.9%
7.2%
2.7%
1.9% <= 2,000 SF [375]
2,001 - 5,000 SF [174]
5,001 - 10,000 SF [45]
10,001 - 20,000 SF [17]
>= 20,001 SF [12]
OFFICE LEASING ACTIVITY BY TENANT SIZE
Percentage of Total Leases Completed in Q2 2014
$2.00
$2.10
$2.20
$2.30
$2.40
$2.50
$2.60
$2.70
$2.80
$2.90
$3.00
$3.10
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
$/SF/Month(FS)
Class A All Classes
HISTORICAL RENTAL RATE TRENDS
Class A & Overall Office Rates
Quarterly Average Asking Rate Per SF Per Month (Full Service)
San Diego’s office space vacancy lowest since 2006
MARKET OVERVIEW
San Diego’s office market continues to strengthen with 210,000 SF of absorption in Q2 2014 thus increasing
the YTD total to 810,000 SF and causing office vacancy to drop to 13.4%, the lowest level since 2006.
North City West, consisting of Carmel Valley (8.2%), Sorrento Mesa (8.1%) and UTC (6.1%) continues to
outperform the market with a combined 7.5% direct Class A vacancy. Other “tight” Class A office markets
include Mission Valley (6.3%), Kearny Mesa (7.0%) and Rancho Bernardo Mesa (7.6%). As you would
expect, rental rates for these markets are increasing. However opportunities can be found in the Class B
office sector were the difference between Class A and B rental rates can reach 30%.
In June 2014, San Diego added 9,700 employees lowering the unemployment level to 6.1%. The job gains
were led by healthcare and the high-paying professional STEM fields (Science, Technology, Engineering,
& Math). Venture Capital (VC) investment for startup companies made gains in San Diego during Q2.
According to The Money Tree survey, 26 local companies raised $222 million last quarter. Most notably
were Otonomy ($49M), Verdezyne ($48M), Cidara Therapeutics ($32M), Sotera Wireless ($21M) and
Tealium ($20M). Furthermore, Illumina announced that it will increase its local operations by 300
employees.
However, Omnitracs, Websense and Active Network will be relocating a significant portion of their
employees to Texas for tax incentive perks. Others, such as Microsoft, will be reducing their workforce at
their Rancho Bernardo location and Allergen will be cutting 100 jobs in Carlsbad. Large office sublease
vacancies, such as Cricket/AT&T (200,000 SF) in Kearny Mesa and American Specialty Health (190,000
SF) in Sorrento Mesa have yet to be leased.
NET ABSORPTION AND VACANCY
The Class A office segment saw the most demand during Q2 with 167,000 SF of net absorption. Class C
office absorbed 79,000 SF while Class B office lost 36,000 SF. Carmel Valley (+77,000 SF) and Mission
Valley (+74,000 SF) recorded the most positive net absorption in Q2. In Carmel Valley, Perkins Coie
expanded and now occupies 34,000 SF at Del Mar Gateway while iTron moved into 20,000 SF at Del Mar
Tech Center. In Mission Valley, San Diego Unified School District purchased the 40,000 SF River Bank
Plaza as an owner/user.
Rancho Bernardo posted negative net absorption of 117,000 SF in Q2 primarily from Chase Bank vacating
131,000 SF. The suburban submarkets of Campus Point (31.6%), Torrey Pines (24.7%) and Scripps Ranch
(20.5%) maintain the highest vacancy rates in the county.
Most of the Downtown (CBD) leasing activity continues to be the smaller 2,000 to 5,000 SF tenants with
landlords responding by creating speculative office space to fuel this demand. Many of these smaller firms
are startups that cater to the Gen Y offering unique perks and the “buzz” of working in the CBD. As a
bonus, the lease rates are more affordable as compared to the suburbs.
Countywide Class A ($2.90/SF) and Class B ($2.25/SF) rates increased. For Class A asking rates, Carmel
Valley averages $3.70/SF; UTC averages $3.35/SF; Sorrento Mesa averages $3.15/SF; Mission Valley
averages $2.80/SF and Downtown (CBD) averages $2.65/SF.
LARGE TENANT ACTIVITY AND OPPORTUNITIES
The largest signed lease transactions include: Synthetic Genomics (70,000 SF), Human Longevity
(56,000 SF), Intercept Pharmaceuticals (47,000 SF) and Pathway Genomics (45,000 SF) all within the
UTC area; the GSA Immigration Services (53,000 SF), AECOM (47,000 SF) and Arbor Education (31,000
SF) in the CBD; Sheppard Mullin’s (54,000 SF) early lease renewal in Carmel Valley; and The County of
San Diego (33,000 SF) in City Heights. Several tenants are in negotiations at various projects throughout
San Diego, most notably the State of California’s Attorney General for over 100,000 SF in the CBD.
Executive suite operators have been absorbing a sizable amount of office space in San Diego recently.
Specifically, Regus has construction underway at 3 new sites in Mission Valley, Kearny Mesa and Sorrento
Mesa bringing their San Diego total to 16. Real Office Centers is expanding with their 3rd location in the
CBD. Premier Business Centers has 4 locations, and Barrister Executive Suites has 3 locations.
Future CBD vacancy may be affected as the new landlord at 625 Broadway is planning to convert their
223,000 SF office building into residential units.
NEW SUPPLY AND CONSTRUCTION
In Q2 2014, the 34,000 SF Quail Garden Corporate Center in Encinitas was completed with 24,000 SF
absorbed. In Carmel Valley’s Torrey Reserve, American Assets has three additional office/medical/retail
buildings totaling 45,000 SF under construction.
Additionally, The Irvine Company is well underway on One La Jolla Center in UTC, a 306,000 SF Class
A office building targeted for completion in mid-2015. Cisterra’s 320,000 SF build-to-suit office tower
for Sempra Energy in Downtown is expected to be completed in late-2015. Construction is also nearing
completion on Qualcomm’s 410,000 SF building in Sorrento Mesa.
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2. Average rental rates are defined as the average asking monthly rate per square foot normalized to a “full service gross” basis.
SUMMER 2014 | OFFICE
TENANT ADVISORY SERVICES TENANT OUTLOOK REPORT
SAN DIEGO COUNTY
Submarket / Class Bldgs
Total
Inventory
SF
Direct
Vacancy
Rate
Sublease
Vacancy
Rate
Total
Vacancy
Rate
Prior Qtr
Vacancy
Rate
Net Abs
Current Qtr
SF
Net Abs
YTD
SF
DOWNTOWN
A 20 7,257,266 16.8% 1.0% 17.9% 18.6% 54,316 (53,231)
B 25 2,231,597 20.1% 0.1% 20.2% 20.2% (98) 2,791
C 13 683,662 24.4% 0.0% 24.4% 24.5% 542 6,134
TOTAL 58 10,172,525 18.1% 0.8% 18.8% 19.4% 54,760 (44,306)
MISSION VALLEY
A 13 2,017,208 6.3% 1.0% 7.4% 8.6% 23,873 1,931
B 64 3,454,191 9.2% 0.6% 9.7% 11.4% 57,119 67,167
C 67 1,606,330 8.4% 0.1% 8.4% 8.2% (3,860) (3,334)
TOTAL 144 7,077,729 8.2% 0.6% 8.8% 9.8% 77,132 65,764
KEARNY MESA
A 15 1,858,959 7.0% 0.6% 7.6% 6.9% (11,951) (16,973)
B 106 5,225,351 13.4% 0.2% 13.7% 13.7% 2,105 100,949
C 91 1,875,982 17.8% 0.0% 17.8% 18.5% 13,038 37,713
TOTAL 212 8,960,292 13.0% 0.2% 13.3% 13.3% 3,192 121,689
UTC
A 21 3,504,970 6.1% 0.6% 6.7% 6.9% 6,220 420,785
B 12 1,105,799 22.3% 0.0% 22.3% 20.0% (26,004) (67,517)
C 6 320,381 3.4% 0.0% 3.4% 3.2% (518) 582
TOTAL 39 4,931,150 9.6% 0.4% 10.0% 9.6% (20,302) 353,850
SORRENTO MESA
A 23 3,819,784 8.1% 0.8% 8.9% 8.7% (8,221) (57,133)
B 51 3,878,029 8.3% 0.4% 8.7% 8.1% (23,188) (51,107)
C 42 866,951 8.3% 0.0% 8.3% 9.6% 10,976 20,005
TOTAL 116 8,564,764 8.2% 0.5% 8.7% 8.5% (20,433) (88,235)
CARMEL VALLEY
A 44 3,787,819 8.2% 2.6% 10.9% 12.2% 49,295 194,778
B 25 1,253,709 14.6% 3.0% 17.7% 19.6% 24,323 1,912
C 1 13,914 0.0% 0.0% 0.0% 0.0% 0 0
TOTAL 70 5,055,442 9.8% 2.7% 12.5% 14.0% 73,618 196,690
RANCHO BERNARDO
A 19 2,232,431 7.6% 0.8% 8.4% 9.1% 15,720 (1,551)
B 58 2,651,871 13.6% 0.0% 13.6% 8.4% (137,851) (112,012)
C 25 490,093 9.1% 0.0% 9.1% 10.2% 5,383 8,148
TOTAL 102 5,374,395 10.7% 0.3% 11.0% 8.8% (116,748) (105,415)
CARLSBAD
A 44 2,000,467 19.8% 1.4% 21.2% 21.9% 14,699 (9,222)
B 108 2,939,858 15.4% 1.1% 16.5% 16.7% 3,328 24,060
C 36 512,717 16.4% 0.4% 16.8% 19.0% 11,136 692
TOTAL 188 5,453,042 17.1% 1.1% 18.3% 18.8% 29,163 15,530
SAN DIEGO COUNTY OFFICE
A 275 31,374,544 12.2% 1.0% 13.2% 13.8% 166,825 463,493
B 970 35,329,524 13.9% 0.5% 14.4% 14.2% (35,824) 253,890
C 1,145 15,370,182 11.3% 0.2% 11.5% 12.0% 78,557 86,231
TOTAL 2,390 82,074,250 12.8% 0.6% 13.4% 13.6% 209,558 803,614
San Diego County Office Market�
VACANCY NET ABSORPTIONEXISTING PROPERTIES
OFFICE OVERVIEW
Q2 2014
Colliers International | Accelerating success. | www.colliersTAS.com

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This report has been prepared by Colliers International for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made
as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their
own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes
all liability for loss and damages arising there from.
Accelerating success.
TENANT OUTLOOK REPORT | SUMMER 2014 | OFFICE | SAN DIEGO COUNTY
Tenant Advisory Services
www.ColliersTAS.com
> Only represent tenants in their
office lease and purchase
negotiations
> Provide objective conflict-free
advice with full service
resources
> Increase profitability &
mitigate risk
RON MILLER
Senior Director
Tenant Advisory
Services
858.677.5363
LIC # 00874868
Ron Miller is a tenant advisory
specialist. His expertise encompasses
relocation / expansion / contraction
strategies, lease renewal and
restructuring, market analysis, and
user purchase opportunities. With
his extensive career experience
in representing both tenants
and landlords, Ron offers a
unique perspective and valuable
insight to his tenant clients.
19.8
20.7
16.7
9.6
17.5
16.5
21.4
18.1
17.1
23.3
14.7
21.3
14.9
14.4
29.4
13.1
16.0
16.1
17.1
13.8
17.9
10.5
15.3
19.2
16.9
17.1
15.4
0
5
10
15
20
25
30
35
Downtown Mission
Valley
Kearny
Mesa
UTC Sorrento
Mesa
Carmel
Valley
Rancho
Bernardo
Carlsbad San Diego
County
Months
Class A Class B All Classes
OFFICE SPACE TIME-ON-THE-MARKET
Average Months by Submarket and Class
TIME ON MARKET
Time-on-the-market for Class A office space is averaging 17.1 months countywide.
60.2%
27.9%
7.2%
2.7%
1.9% <= 2,000 SF [375]
2,001 - 5,000 SF [174]
5,001 - 10,000 SF [45]
10,001 - 20,000 SF [17]
>= 20,001 SF [12]
OFFICE LEASING ACTIVITY BY TENANT SIZE
Percentage of Total Leases Completed in Q2 2014
$2.00
$2.10
$2.20
$2.30
$2.40
$2.50
$2.60
$2.70
$2.80
$2.90
$3.00
$3.10
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
$/SF/Month(FS)
Class A All Classes
HISTORICAL RENTAL RATE TRENDS
Class A & Overall Office Rates
Quarterly Average Asking Rate Per SF Per Month (Full Service)
RENTAL RATES
For the last two years, the
countywide average asking
rental rate has steadily
increasing from a low of
$2.10/SF on a “full service
gross” basis. Q2 2014 was
the tenth consecutive
quarter where the rate has
either increased or remained
flat with the current rate of
$2.24/SF exhibiting a $0.04
increase during the quarter.
The Class A rate also posted
a large quarterly increase of
$0.04 to $2.86/SF.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
011 2012 2013 2014
Q2
VacancyRate
Vacancy
Y RATES
60.2%
27.9%
7.2%
2.7%
1.9% <= 2,000 SF [375]
2,001 - 5,000 SF [174]
5,001 - 10,000 SF [45]
10,001 - 20,000 SF [17]
>= 20,001 SF [12]
OFFICE LEASING ACTIVITY BY TENANT SIZE
Percentage of Total Leases Completed in Q2 2014
$2.00
$2.10
$2.20
$2.30
$2.40
$2.50
$2.60
$2.70
$2.80
$2.90
$3.00
$3.10
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
$/SF/Month(FS)
Class A All Classes
HISTORICAL RENTAL RATE TRENDS
Class A & Overall Office Rates
Quarterly Average Asking Rate Per SF Per Month (Full Service)
LEASING ACTIVITY
A total of 623 leases were
completed in Q2 totaling 1.9
million square feet. This
equated to a 12% increase in
total leases compared to Q1
2014. Leasing volume will
likely continue to be robust in
2014, allowing vacancy to
continue to decrease while
fueling rental increases due to
the accelerated demand.
www.ronmillersd.com
Colliers International | Accelerating success. | www.colliersTAS.com