Office Market Reality Check: San Diego's Commercial Sector Is Bifurcating, Not Recovering
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New second-quarter data from Kidder Mathews and JLL challenges a narrative that had been gaining traction in commercial real estate circles: San Diego's office market is not in recovery. The market posted negative direct net absorption of about 172,000 square feet in Q2 2026, bringing cumulative 2026 direct absorption to negative 133,000 square feet. Negative absorption means more space is being vacated than is being newly leased — and it effectively corrects earlier reports suggesting the market had achieved two consecutive quarters of positive absorption. What appears to have occurred is that certain submarkets, particularly Eastgate, showed genuine positive momentum while the countywide picture remained negative when accounting for space surrendered elsewhere.
JLL's July 7 update places the overall office vacancy rate at 13.4 percent — flat quarter over quarter but up 40 basis points year over year. Leasing activity in Q2 totaled approximately 937,600 square feet, a 25.9 percent decline from the roughly 1.3 million square feet recorded in Q2 2025. JLL flags a clear 'flight to quality' trend: newer, higher-amenity Class A buildings are holding up, while older suburban office parks and older downtown buildings are struggling significantly. The vacancy problem is not evenly distributed — it is concentrated in precisely the building stock that is hardest to reposition.
TenantBase's Q2 commercial market analysis illustrates where demand actually sits. Of active tenant searches over the past 90 days, retail accounted for approximately 55.9 percent (142 deals) and warehouse for 32.7 percent (83 deals). Office was a distant third at 13 percent, representing just 33 deals. For city economic development officials and county planners, the market is signaling that incentives and zoning flexibility should follow logistics, warehouse, and neighborhood retail — not traditional office.
Two notable office acquisitions did close in the quarter. Tryperion Holdings acquired the 73,230-square-foot Crossings Corporate Centre for approximately $23 million, and Midtown National Group purchased a roughly 44,000-square-foot building on South Cedros Avenue for $24 million. Analysts suggest these buyers are likely betting on repositioning or value-add scenarios rather than a broad market recovery.
The multifamily sector presents a contrasting picture. Despite a wave of new units expected to deliver in the market this year, vacancy has remained below the national average, supported by what analysts describe as robust long-term workforce housing demand. Meanwhile, the Otay Mesa Southwest Village development — a 5,100-home project from Tri Pointe Homes — is advancing despite opposition from private landowners who argue rezoning damages their property values, though federal wildlife compliance requirements must be resolved before construction can begin. The project encapsulates every tension in San Diego housing: supply need, environmental constraints, private property rights, and community opposition converging simultaneously.