The Southwest Region—spanning key markets like Phoenix, Denver, Las Vegas, and San Diego—continues to shift gears in 2025. Following years of rapid growth, the region is experiencing a recalibration. Industrial and retail remain steady, while multifamily faces supply challenges, and office continues to evolve. Throughout, investor sentiment is cautiously optimistic, with many watching for signs of bottoming in certain sectors.
San Diego Market Overview: Navigating Change in Q2
San Diego’s commercial real estate (CRE) market is adjusting to new realities. The second quarter of 2025 shows a city balancing rising vacancies in some sectors with encouraging momentum in others. Office space downtown continues to struggle, while industrial leasing picks up in trade-driven submarkets. Multifamily is navigating oversupply, and retail remains San Diego’s most stable and selective asset class.
Office Market: Downtown Vacancy Climbs, Suburbs Hold Ground
San Diego’s office market continues to face pressure. Citywide vacancy reached 13.1%, and Downtown surpassed 35%. New projects like the Campus at Horton and RaDD remain largely unleased, contributing to record-high availability. Real vacancy could be closer to 50% when factoring in unused and unlisted space.
Despite these challenges, suburban areas such as Del Mar Heights and Kearny Mesa are holding strong, with vacancies below 10%. Tenants are flocking to well-located, modern spaces, avoiding aging inventory downtown.
What This Means for You:
Industrial Market: Otay Mesa Leads Leasing Recovery
After over two years of negative net absorption, the industrial market is finding its footing. Vacancy stands at 9.5%, the highest since 2013, but leasing activity surged this quarter. Otay Mesa is the star performer, with proximity to the border driving strong logistics demand. Small-bay spaces under 50,000 SF remain in demand, especially in El Cajon, Escondido, and Central San Diego.
Flex industrial buildings tied to biotech are facing a slower recovery due to high sublet availability and tempered demand in Torrey Pines and Sorrento Valley.
What This Means for You:
Multifamily Market: High Supply, Flat Growth
Multifamily is in a holding pattern. Vacancy sits at 5.3% overall, but luxury apartments downtown and around Balboa Park are closer to 9%. Despite 4,700 units absorbed in the past year, generous concessions—6–8 weeks of free rent—are common. Rent growth is minimal at just 0.2% year-over-year.
A total of 9,200 units remain under construction, with several large projects due by 2026. High living costs and economic pressures are pushing renters toward more affordable or shared housing options.
What This Means for You:
Retail Market: Low Vacancy and High Selectivity
Retail is holding firm with a 4.4% vacancy rate and solid tenant demand. Service-based businesses and discount retailers are driving most of the leasing. Class A space in affluent areas like UTC, La Jolla, and Encinitas remains highly competitive.
Much of the available inventory is in older buildings or less affluent neighborhoods, where leasing has slowed. New retail development is minimal, with most new space tied to mixed-use projects.
What This Means for You:
Final Takeaways
Q2 2025 reveals a San Diego market that is adapting rather than retreating. Office continues to evolve with structural vacancy downtown. Industrial is rebounding, led by Otay Mesa. Multifamily remains under pressure but stable, and retail is steady, driven by lack of supply and selective tenant demand.
For investors, owners, and real estate professionals, success in today’s market hinges on adaptability, local knowledge, and a focus on submarket strengths. Keep watching, keep learning—opportunity lies in precision.
Ready to Take the Next Step?
Whether you’re buying, selling, leasing, or investing in San Diego commercial real estate, our expert advisors at SVN | Vanguard can help you navigate today’s market with clarity and confidence.
Source: Costar
