4.2%

Net AbsorptionQ1 2017

(58,325) SF

colliers.com/sandiego

MARKET INDICATORSAll Office Markets & Classes, Q1 2017

Q1 2017 Q1 2016 Change

Overall Vacancy (incl. sublease) 11.38% 12.38%

Net Absorption SF (58,325) 466,455

Under Construction SF 376,454 65,500

Average Asking Rent (FSG) $2.59 $2.44

Under ConstructionQ1 2017

UnemploymentSD County - Feb. 2017

376,454 SF

Behind the Numbers > 2017 started off on a flatter note posting slightly negative net absorption of 58,325 SF county-wide.

> Notwithstanding, overall average asking rental rates county-wide increased to the highest achieved rate in the last eight years ($2.59/SF/month).

> Speculative construction is picking up after years of limited development – 731,457 SF will be completed in 2017 and 2018.

Trend Forecast & OutlookDecreased real estate activity this past quarter was due in part to prevailing political and economic uncertainties and subsequent deferred business decisions. While this was the first quarter of negative absorption since Q4 2015, it is too early anticipate if Q2 will continue to post additional scaling back of demand. Comparing back to when Q4 2015 posted nearly 72,000 SF of negative net absorption, it was followed by eight consecutive quarters of strong positive net absorption. One negative quarter does not infer a continued trend in that direction.

The market fundamentals continue to be healthy: job growth, decreased unemployment rates and business expansion. Barring any recessionary dynamics, the office market will most likely achieve positive demand and continued decreasing vacancy for this year.

Net AbsorptionEven with 58,325 SF of negative net absorption, demand was strong in Kearny Mesa (+127,150 SF) and Carlsbad (+61,187 SF). Kearny Mesa’s demand was bolstered by Le Lycee Francis occupying 60,480 SF at 8401 Aero Dr. AVID purchased 9797 Aero Dr in January and occupied two-thirds (62,558 SF) of the building during the quarter. In Carlsbad, GW Pharmaceuticals – represented by Tom Nicholas of Colliers International – occupied 21,894 SF at 5750 Fleet St and Vertiflex moved into 14,414 SF at 2714 Loker Ave W.

Rancho Bernardo posted the greatest decline (-165,351 SF) followed by Carmel Valley (-74,702 SF). Jones Day vacated 52,525 SF at Paseo Del Mar in Carmel Valley to relocate to “One La Jolla Center” in UTC. In Rancho Bernardo, Broadcom vacated 66,792 SF at “Discovery Corporate Center.”

Research & Forecast Report

SAN DIEGO COUNTY | OFFICEQ1 2017

Office Demand Eases as 2017 Begins

Total Vacancy RateAll Product Types - Q1 2017

11.38%

Total Job Growth - Last 12 Months

JOB GROWTHSource: Bureau of Labor Statistics, 12-month change (02/2016-02/2017), San Diego County

Professional & Business Services Financial Activities

26,700new jobs

increase1.9%

1.9%

4,400new jobs

4.2%

3,000new jobs

2 San Diego County | Overall County Research & Forecast Report | Office | Q1 2017

Significant Office Activity - Q1 2017Leasing

Sales

Property/Address Tenant Submarket Class Size (SF) Deal Type8954 Rio San Diego Drive Union Bank Mission Valley A 51,428 Renewal

3611 Valley Centre Drive ACADIA Pharmaceuticals Carmel Valley A 26,437 New corporate headquarters location

1555 Faraday Avenue Proficio Carlsbad B 24,278 New location

8989 Rio San Diego Drive Considine & Considine Mission Valley B 20,088 New location

450 B Street LEVITZACKS Downtown B 14,424 New location

2355 Northside Drive GeoSyntec Consultants Mission Valley A 12,254 New location

Property/Address Submarket Class Size (SF) Sale Price $/SF Buyer Seller6165-6363 Greenwich Dr (4 bldgs) Governor Park A 260,421 $83,560,000 $321 Regents of UC The Blackstone Group

101 Ash Street Downtown B 314,545 $72,440,000 $230 Cisterra / Shapery Manchester / Shapery

9797 Aero Drive Kearny Mesa A 92,463 $30,125,000 $326 AVID Bixby Land Company

333 H Street Chula Vista A 131,760 $27,825,000 $211 Scripps Health U.S. Bank National Assc.

15373 Innovation Drive Rancho Bernardo

A 77,559 $17,000,000 $219 CVOP Associates, LLC BRE CA Office Owner LLC

2251 San Diego Avenue (2 bldgs) Old Town B 60,490 $13,825,000 $229 Westbrook Partners Peregrine Realty Partners

* Price includes building and additional developable acreage.

Most of the other submarkets had very little net activity either way. Of the 26 submarkets county-wide, 20 had net positive or negative absorption totaling under 30,000 SF. Leasing activity – which tracks signed leases that affect current and near-future absorption – totaled 1.5 million SF. This was down 35% from leasing activity recorded the prior quarter (Q4 2016) and down 32% from a year-ago (Q1 2016).

VacancyCounty-wide vacancy of 11.4% in Q1 was nearly unchanged from the prior quarter, which amounted to a 3 basis point increase. The vacancy rate was comprised primarily of direct vacant space (10.6%) with minimal sublease space (0.8%).

Overall vacancy in Downtown stood at 15.5% - up from 14.8% at year-end 2016 and due to 66,251 SF of negative net absorption caused by numerous multi-tenant move-outs. In addition to any other activity over the next six months, vacancy in Downtown will drop by almost 2% when the City of San Diego vacates 1010 2nd Avenue and expands into 101 Ash Street.

New SupplyIn Q1, a total of 105,635 SF was completed county-wide to include the 96,435 SF Class A “Eastgate Terrace” in UTC and a 9,200 SF office building on Harbor Drive in the Old Town/Sports Arena/Point Loma submarket. No leasing had occurred in either project at the end of Q1.

As of quarter-end, there were seven buildings totaling 376,454 SF under construction. Of that, 192,272 SF is expected to be completed by year-end including a 30,632 SF build-to-suit for Global One Ventures in Carlsbad. The remaining speculative projects include two buildings totaling 88,440 SF at “Torrey Point” in Carmel Valley, a 13,200 SF building in La Mesa, and the 60,000 SF building at ”North City” in San Marcos where 40,000 SF is preleased to Pima Medical Institute. Additional projects are expected to be completed in 2018 include a 48,954 SF creative-office building on Aston Avenue in Carlsbad and the 135,228 SF “Centerpointe at Grantville” in Mission Gorge.

All 184,182 SF of space currently under construction that will be completed in 2018 is speculative development. Additionally, grading started on Kilroy Realty’s 1.1 million SF mixed-use “One Paseo” project in Carmel Valley. The two-building 280,000 SF office portion will commence construction later this year with expected completion at the end of 2018.

San Diego Historical Office Market Trends

14.3% 13.8%12.6% 12.9%

11.4% 11.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-0.5

0.0

0.5

1.0

1.5

2.0

2012 2013 2014 2015 2016 2017

Net Absorption Construction Completed Vacancy

Square Feet (Millions) Vacancy Rate

San Diego Historical Office Rental RatesAverage Asking Monthly Rate per SF, Full Service

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

$3.40

Q1

12

Q1

13

Q1

14

Q1

15

Q1

16

Q1

17

Class A All Classes

3colliers.com/sandiego

San Diego County | Suburban Markets and SubmarketsCENTRAL COUNTY

Campus Point 620,187 0.0% 0.0% 0.0% 0.0% 0 0 0 0 0 $2.53 Carmel Valley 5,137,474 13.8% 2.0% 15.8% 14.3% (74,702) (74,702) 0 0 88,440 $4.12

Governor Park 903,576 7.6% 0.4% 8.0% 7.9% (655) (655) 0 0 0 $2.70 Kearny Mesa 8,974,274 9.1% 0.3% 9.3% 10.8% 127,150 127,150 0 0 0 $2.10

La Jolla 1,126,217 8.8% 0.5% 9.3% 7.8% (16,319) (16,319) 0 0 0 $3.18 Miramar 1,390,849 13.8% 0.7% 14.5% 14.1% (6,492) (6,492) 0 0 0 $1.93

Mission Gorge 302,042 6.3% 0.0% 6.3% 9.9% 10,649 10,649 0 0 135,228 $1.14 Mission Valley 6,841,260 8.2% 0.5% 8.6% 10.4% (15,717) (15,717) 0 0 0 $2.41

Old Town / SA / PL 2,373,890 6.7% 0.1% 6.8% 5.9% (11,393) (11,393) 9,200 9,200 0 $2.53 Rose Cyn / Morena 859,873 3.0% 0.0% 3.0% 5.2% 19,475 19,475 0 0 0 $1.85

Sorrento Mesa 9,260,108 11.3% 0.7% 12.0% 12.0% (4,459) (4,459) 0 0 0 $2.78 Sorrento Valley 414,099 11.3% 0.0% 11.3% 10.0% (5,371) (5,371) 0 0 0 $2.32

Torrey Pines 815,477 9.8% 0.0% 9.8% 9.5% (2,650) (2,650) 0 0 0 $3.63 Uptown 1,763,646 8.6% 0.4% 9.0% 8.2% (14,583) (14,583) 0 0 0 $2.35

UTC 5,400,961 12.7% 1.1% 13.8% 12.8% 26,566 26,566 96,435 96,435 0 $3.41 TOTAL 46,183,933 10.1% 0.7% 10.8% 10.9% 31,499 31,499 105,635 105,635 223,668 $2.78

NORTH COUNTYCarlsbad 6,453,727 18.0% 1.0% 19.0% 19.9% 61,187 61,187 0 0 79,586 $2.46

Escondido 1,636,295 8.1% 0.0% 8.1% 9.9% 28,783 28,783 0 0 0 $1.81 I-5 Corridor 1,612,097 5.0% 0.3% 5.4% 4.7% (10,856) (10,856) 0 0 0 $3.35

Oceanside 1,196,677 10.9% 0.0% 10.9% 11.0% 1,037 1,037 0 0 0 $1.87 San Marcos / Vista 2,243,747 12.0% 0.7% 12.8% 13.0% 6,425 6,425 0 0 60,000 $1.92

TOTAL 13,142,543 13.5% 0.7% 14.2% 14.8% 86,576 86,576 0 0 139,586 $2.33

I-15 CORRIDORPoway 1,177,227 3.1% 0.7% 3.8% 7.3% 41,761 41,761 0 0 0 $2.24

Rancho Bernardo 5,471,252 6.2% 3.0% 9.2% 6.2% (165,351) (165,351) 0 0 0 $2.59 Scripps Ranch 2,245,504 8.0% 0.0% 8.0% 7.8% (6,357) (6,357) 0 0 0 $2.32

TOTAL 8,893,983 6.3% 1.9% 8.2% 6.7% (129,947) (129,947) 0 0 0 $2.42

SOUTH/EAST COUNTYEast County 2,976,391 2.9% 0.0% 2.9% 3.3% 10,610 10,610 0 0 13,200 $1.76

South Bay 2,702,179 12.1% 0.1% 12.3% 12.6% 9,188 9,188 0 0 0 $2.42 TOTAL 5,678,570 7.3% 0.1% 7.4% 7.7% 19,798 19,798 0 0 13,200 $2.10

Average rental rates are defined as the average asking monthly rate per square foot across all direct available spaces quoted on a “full service gross” basis.

Office Market Overview - Q1 2017

San Diego County | CBD and Suburban by ClassEXISTING INVENTORY (SF) VACANCY (%) NET ABSORPTION (SF) NEW SUPPLY (SF) Avg

Asking Rate

Type/ Submarket

Total Inventory Direct Sublet Total

Prior Qtr

Current Qtr YTD

Completed Current Qtr

Completed YTD

Under Construction

DOWNTOWN / CBDA 6,541,356 7.5% 0.8% 8.3% 7.5% (49,748) (49,748) 0 0 0 $2.98 B 3,357,962 29.6% 0.3% 29.9% 29.7% (5,819) (5,819) 0 0 0 $2.30 C 425,260 12.0% 0.0% 12.0% 9.4% (10,684) (10,684) 0 0 0 $2.28

TOTAL 10,324,578 14.9% 0.6% 15.5% 14.8% (66,251) (66,251) 0 0 0 $2.58

SUBURBANA 25,117,687 11.4% 1.6% 13.0% 12.3% (63,469) (63,469) 96,435 96,435 197,394 $3.23 B 33,916,825 10.1% 0.4% 10.6% 10.9% (43,337) (43,337) 9,200 9,200 179,060 $2.43 C 14,864,517 7.4% 0.2% 7.6% 8.3% 114,732 114,732 0 0 0 $1.83

TOTAL 73,899,029 10.0% 0.8% 10.8% 10.9% 7,926 7,926 105,635 105,635 376,454 $2.59

SAN DIEGO COUNTY TOTAL (CBD + SUBURBAN)A 31,659,043 10.6% 1.4% 12.1% 11.3% (113,217) (113,217) 96,435 96,435 197,394 $3.18 B 37,274,787 11.9% 0.4% 12.3% 12.6% (49,156) (49,156) 9,200 9,200 179,060 $2.41 C 15,289,777 7.5% 0.2% 7.7% 8.4% 104,048 104,048 0 0 0 $1.89

TOTAL 84,223,607 10.6% 0.8% 11.4% 11.4% (58,325) (58,325) 105,635 105,635 376,454 $2.59

Oceanside

Carlsbad

I-5Corridor

Vista

San Marcos

Escondido

RanchoBernardo

Poway

ScrippsRanch

Miramar

GovernorPark

KearnyMesa

RoseCanyon/Morena

CampusPoint/UTC

La Jolla

SorrentoMesa

Mission Gorge

Mission Valley

SorrentoValley

CarmelValley

TorreyPines

Uptown

CBD

Pt. Loma/Sports Arena

South Bay

East County

SAN DIEGO COUNTY Office Market Areas

Central County

CBD

I-15 Corridor

North County

South/East County

©2017 Colliers International. Information herein has been obtained from sources deemed reliable, however its accuracy cannot be guaranteed. The user is required to conduct their own due diligence and verification.

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Market ContactANDY LA DOWRegional Managing Director | San Diego Region+1 858 455 1515andy.ladow@colliers.com

Regional AuthorCHRISTOPHER REUTZResearch Director | San Diego Regionchris.reutz@colliers.com