The commercial real estate high-rise market in San Diego County continues to navigate a challenging landscape shaped by economic shifts, technological advancements, and evolving tenant preferences.
San Diego's commercial real estate high-rise market has shown resilience in the face of significant challenges. The market continues to adapt to new demands, with a focus on flexibility and technological integration. However, the landscape remains challenging, particularly for older office buildings struggling to compete with newer, more adaptable spaces.
The office sector within high-rise buildings has undergone significant transformation. The widespread adoption of hybrid work models has reshaped demand for office space. Many companies have reevaluated their space needs, leading to increased vacancy rates, particularly in older, less adaptable high-rises.
A "flight to quality" trend persists, with tenants gravitating towards premium spaces that offer enhanced health and safety features, superior air quality systems, and smart building technologies. This has created a two-tiered market, where older buildings struggle to compete without significant upgrades.
Class A buildings with cutting-edge amenities, flexible layouts, and advanced technologies have maintained higher occupancy rates.
Landlords and property managers of older buildings face significant challenges. The cost of upgrading these properties to meet current market demands is substantial, and the return on investment is uncertain given the overall market conditions.
The hospitality sector within high-rise developments has shown strong recovery, benefiting from San Diego's enduring appeal as a tourist and convention destination. Boutique hotels integrated into mixed-use high-rises have become increasingly popular, offering unique experiences for visitors.
The return of conventions and business travel has bolstered this sector, with hotels in well-located high-rises seeing improved occupancy rates and revenue per available room (RevPAR) figures.
Investment and Development:
Investment in the high-rise market has been selective and cautious. Investors have shown preference for properties that offer flexibility and potential for repositioning without requiring prohibitively expensive overhauls. New development has slowed compared to pre-pandemic levels, with a focus on projects that incorporate the latest in building technologies and design trends.
The life sciences sector has been a bright spot, with some high-rise developments incorporating lab and research spaces, particularly in areas like UTC and Sorrento Valley. This trend has been driven by San Diego's strong biotech and healthcare industries.
Market Challenges:
1. High vacancy rates in older office buildings, with limited viable options for repurposing
2. Rising construction costs and interest rates, posing challenges for new developments and major renovations
3. Uncertain long-term impact of remote and hybrid work on office space demand
4. Regulatory changes requiring significant investments in older buildings
5. Difficulty in securing financing for speculative projects or major repositioning efforts
Outlook:
The San Diego County commercial real estate high-rise market faces significant challenges, particularly in the office sector. The success of individual properties will largely depend on their ability to meet changing tenant preferences, particularly in terms of flexibility, technology integration, and overall user experience.
Investors and developers are likely to remain cautious, focusing on properties and projects with strong fundamentals and clear potential for value appreciation. The emphasis will be on adaptable spaces that can weather economic uncertainties and changing market demands.
The market is not seeing widespread conversions of office buildings to residential use, as the costs and risks associated with such projects remain prohibitive for many investors and lenders. Instead, the focus is on finding creative ways to reposition and upgrade existing office spaces to meet current market demands.
Overall, the high-rise market in San Diego County presents a mixed picture. While prime, well-located properties with modern amenities continue to perform well, many older buildings face an uncertain future. The key to success in this market will be strategic investment in technology and upgrades, a keen understanding of local market dynamics, and the ability to create flexible spaces that can adapt to evolving tenant needs.
The information contained in this Higgins Capital communication is provided for information purposes and is not a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction. Past performance does not guarantee future results.
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