For tenants eyeing office space in San Diego’s Central Business District or considering early lease renegotiations, understanding the current market dynamics is paramount. The first quarter saw a notable rise in vacancy rates, climbing 70 basis points since last year to reach an all-time high of 27.6%. This trend is expected to persist as more office developments reach completion throughout the year.

Downtown San Diego has witnessed a significant shift in occupancy since 2020, with firms increasingly opting for suburban locales like Mission Valley and North County. Recent pending lease agreements by the city of San Diego reflect this trend, signaling a potential reduction in downtown occupancy by nearly 75,000 square feet. Notably, suburban offices often offer amenities like ample free parking, a stark contrast to the limited parking options in downtown locations.

One factor impacting downtown occupancy is concerns about the homeless population, which have deterred some businesses from maintaining a presence in the area. This, coupled with a decline in net absorption over the past two years, paints a challenging picture for downtown landlords.

Landlords have been compelled to offer enticing incentives to attract tenants, such as extended periods of free rent and increased tenant improvement allowances. However, these incentives may not fully offset the costs of build-outs, posing additional challenges for tenants focused on cost control.

Looking ahead, the completion of upcoming projects like West, RaDD, and Campus at Horton is poised to further increase downtown vacancy rates. Speculations suggest that vacancy rates could surpass 35%, potentially reaching 50% due to the prevalence of shadow space in the central business district.

Despite these challenges, there is optimism about Downtown's long-term prospects, driven by its vibrant cultural scene and appeal to younger demographics. However, navigating the current leasing landscape requires careful consideration and, ideally, the expertise of a tenant representation agent. Such professionals can provide invaluable guidance, helping tenants secure favorable terms amidst evolving market conditions.