San Diego has been one of the few major markets in California that has seen positive absorption in the office sector since the pandemic hit, but economic headwinds are now having a negative impact. A new report from Kidder Mathews indicates leasing volume in the second half of 2022 dropped to 1.1 million square feet, a 50% year-over-year drop and the lowest level since the end of 2020.

The investment picture is also cloudy as buyers have begun to show more caution amid high interest rates. Investments for life science conversions do remain popular, but is expected to slow as venture capital fell 50% in 2022.

Kidder Mathews’ near term outlook calls for a persistent slowdown in 2023 as high interest rates and recession concerns will weigh heavily. Meanwhile, expect the flight to high-quality and less expansive office space to continue, as companies focus on retention by prioritizing employee proximity and attractive amenities.