Some have said that the COVID-19 pandemic will mean an end to the office as we know it, particularly in metro areas such as San Diego with its strong gig economy and bias toward work-from-home arrangements.
Others have predicted commercial space will bounce back as COVID slowly wanes and people crave a return to normalcy. At Commercial Asset Advisors San Diego and Downtown Works, we are seeing something in the middle.
So, which types of property appear to be the winners and losers in San Diego commercial real estate during the pandemic? Here’s our take.
Losers
Office space downtown (sort of) Downtown San Diego office buildings are still experiencing lower tenant levels. Today the office availability rate is nearly three-quarters higher than pre-pandemic levels. Still brokers and building owners are hanging on, confident that office space will make a full return as the pandemic wanes.
Outside of the downtown area, companies seem comfortable making longer-term leasing decisions again, and quarterly leasing volume has nearly returned to pre-pandemic levels. Occupancy losses following the outbreak have mostly subsided with positive net absorption countywide as lease agreements are being signed again.
Retail Most retailers relied on PPP loans or deferred rent and were able to make it. Luckily, we did not see the level of failed businesses that many initially predicted for San Diego County. And in some areas, retail space fared even better than office space.
Yet ensuring adequate personnel remains challenging as retail real estate continues to tread water in San Diego County. We will have to wait to see how it plays out.
Winners
Office space near the suburbs Other than Downtown San Diego, we are seeing office space throughout San Diego County largely rebounding, with many areas seeing increases in asking rents. Office building owners feel confident in the rebound, arguing that businesses will be forced to increase their office space to allow for social distancing, as we have all seen the ability of a contagious virus to severely impact business.
Co-working communities The pandemic showed businesses the value of distributed teams, so co-working properties are seeing a spike, especially as companies find themselves competing for top talent. Top performers want the flexibility to work from home and still have all the amenities of an office space when they need them.
Moreover, renting office space under a traditional square-foot leasing scheme is more complicated than ever. The post-pandemic environment calls for more nuanced office agreements that consider each company’s culture, life cycle, team size and required amenities. So co-working becomes a good business decision for many companies because it significantly reduces a company’s overhead by eliminating utilities, office machines, coffee, and many other costs.
Companies throughout San Diego have found co-working to be a flexible solution to accommodate fluctuations in staff and business as uncertainty continues to drive space planning. We think many of these businesses will permanently embrace a hybrid office model and make co-working part of their employee office space planning.
To meet this need, Downtown Works is opening a new location in Pacific Beach, and early interest has been high from those wanting to bike or walk to an office after almost two years of working exclusively from their homes nearby.
Industrial Space This has been another winner in the pandemic. Vacancies are down, as the need for industrial space has been driven by increased online distribution of goods and supply-chain issues. Investors are seeking more of this type of investment right now, and it will be interesting to see if this sector continues to grow as we rebound from the pandemic.
Did COVID mean the demise of the office in San Diego? No, but “going to the office” will continue to look much different. Gone are the days of the one-size-fits-all leasing model. Our post-pandemic world calls for a tailored approach that takes into consideration where the company is, what amenities its team requires, and what its culture needs to thrive.
Mike Conger is the principal broker at Commercial Asset Advisors San Diego and David Adato is director of the Downtown Works co-working communities.