Downtown San Diego is currently navigating a significant period of change, with new data revealing that approximately a quarter of its office space is unoccupied. This shift reflects a broader, post-pandemic reassessment of urban commercial real estate, prompting a new wave of investment and a fundamental reimagining of the city's core.
While the numbers point to a challenging market, they also signal a pivotal moment. The city is witnessing a transformation from large, institutional ownership to a more diverse group of local investors who are introducing new ideas for revitalizing the area.
Key Takeaways
- Downtown San Diego's office vacancy rate is in the high 20% range, with future availability projected in the low 30s.
- The market is shifting from large institutional owners to smaller, local investors with a focus on community-oriented projects.
- Factors influencing the high vacancy include remote work trends, parking challenges, and the city's homelessness crisis.
- Despite challenges, foot traffic to downtown businesses has recovered to 99% of pre-pandemic levels, indicating strong underlying activity.
A Market in Flux
Recent third-quarter data paints a clear picture of the current state of Downtown San Diego's commercial real estate. The office vacancy rate has climbed into the high 20% range, a stark contrast to the single-digit figures that typically define a healthy market. Projections for future availability are even higher, approaching the low 30s.
This trend is not unique to San Diego. According to Matt Carlson, an executive vice president at commercial real estate services firm CBRE, this is a pattern seen across the West Coast. "We’ve seen the urban centers and the West Coast all be slower to return back to their pre-pandemic normal," Carlson noted, placing San Diego's experience within a wider national context.
However, the overall numbers don't tell the entire story. Some of the buildings included in these statistics are already slated for conversion into residential units or hotels, a process that will naturally reduce the commercial office inventory over time. This adaptive reuse is a key part of the city's evolving landscape.
The Forces Behind the Vacancies
The primary driver behind the empty office space is the seismic shift in work culture. The widespread adoption of remote and hybrid work models means fewer employees are commuting into a central office five days a week. This has led many companies to downsize their physical footprint or reconsider the need for a large downtown presence altogether.
Beyond remote work, other local factors contribute to the situation. Persistent challenges with parking and the city's ongoing homelessness crisis have also influenced the decisions of both tenants and investors.
Not a Uniform Picture
While the overall vacancy rate is high, the situation varies significantly by neighborhood. For example, the west end of Broadway shows a much healthier vacancy rate of 14%. This suggests that prime locations with modern amenities remain more resilient and attractive to businesses, even in a challenging market.
This discrepancy highlights a flight to quality, where companies that do maintain a physical office are increasingly seeking out Class A buildings with premium amenities. These modern facilities, often featuring gyms, pools, and collaborative spaces, offer a compelling reason for employees to come into the office.
A New Generation of Ownership
One of the most significant changes in Downtown San Diego's real estate market is the changing profile of its property owners. For over a decade, the market was dominated by a few large-scale investment firms, with just two owners controlling nearly half of the downtown office space. That era is coming to an end.
A major player, the Irvine Company, has recently sold key properties, including 501 West Broadway and 225 West Broadway. This has opened the door for new, smaller-scale investors to enter the market. Carlson anticipates a major shift in the ownership landscape.
"If you go back the last 14 years, there have been two owners that have owned half of downtown and that completely changes the market versus what we’re seeing today, where at the end of this transition we’re going to end up with no owner that owns more than maybe two buildings," he said.
This fragmentation of ownership is bringing fresh perspectives and investment strategies to the downtown area. One of the new owners is Daniel Negari, founder and CEO of XYZ, who acquired the two Broadway properties. His approach is already showing signs of success.
"We’ve already signed three leases, and we have 18 leases pending, so we have quite a lot of activity. We’re currently sitting in the mid 80s occupancy wise," Negari stated, referring to the 501 West Broadway building. His strategy focuses on what he calls "impact investing," with plans to use his properties to host community-focused events like farmers markets and a holiday ice skating rink. "We’re really looking to be that central meeting point to bring everybody together," he added.
Reimagining San Diego's Urban Core
Despite the high office vacancy, other economic indicators suggest a resilient downtown. The San Diego Regional EDC highlights that foot traffic to local businesses has rebounded impressively, reaching 99 percent of pre-pandemic activity. This demonstrates that people are still coming downtown for dining, entertainment, and shopping, even if not for work.
A Tale of Two Metrics
While office vacancy sits near 30%, foot traffic for downtown businesses has recovered to 99% of its 2019 levels. This suggests a decoupling of office use from overall economic activity in the city's core, pointing towards a future where downtown is less reliant on traditional office workers.
Mark Cafferty, president and CEO of the EDC, acknowledged the challenges but emphasized the opportunities. In a statement, he noted the "seismic shifts in work and office needs" but also pointed to positive developments, such as globally-renowned conferences and innovative companies choosing Downtown San Diego for their new homes.
Cafferty's statement underscored the importance of collaboration in shaping the city's future. "All this is possible through continued collaboration between new and legacy players who are actively helping to redefine our urban core," he said. "Now is a critical opportunity for these local players to double down and continue investing in new plans, new ideas, and a new vision for a reimagined, competitive, and resilient Downtown."
The current period, while marked by empty offices, is increasingly viewed not as a decline but as a necessary and dynamic transition. The shift towards a more diverse ownership base, a focus on community engagement, and the adaptation of old buildings for new purposes are all part of a larger effort to build a more vibrant and multifaceted downtown for the future.