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Demand for industrial space gains momentum

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A just-released Burnham Real Estate study shows that demand for San Diego County industrial space rose significantly during the first quarter of 2005. The 915,000 square feet of recorded net absorption for the three-month period ending March 31, 2005, equates to 70 percent of the 1.3 million square feet of net absorption recorded during all of 2004.

According to the Burnham report, research and development (R&D) space also saw increasing activity, with 207,000 square feet of net absorption, the sector's highest quarterly performance since 2000 (excluding the occupancy of the new Biogen-Idec facility in Oceanside during the fourth quarter of 2004).

"Both sectors are reporting stronger momentum, with industrial/warehouse space clearly at the forefront," said Chris Holder, vice president with Burnham Real Estate. "Industrial vacancy stands at 9.6 percent based on total leasable inventory, and R&D vacancy is also declining, currently hovering at 14.1 percent."

Based upon total inventory - which includes fully occupied owner-user buildings - the industrial and R&D vacancy rates are even lower, at 6.9 percent and 10.7 percent, respectively. "The trend of users buying their facilities is removing more occupied space from the leasable inventory, creating a slight upward skew on vacancy rates," said Holder.

The fact that industrial construction slowed down markedly following its peak in 1999 has also helped to equalize supply to current demand. "In 1999 alone, 7.1 million square feet of new industrial space came on line representing 12 percent of the total existing inventory that year," he said. "Despite that surge in construction, the industrial sector was able to absorb the excess space pretty quickly, and the vacancy rate has settled in the 5 - 7 percent range since then. In 2005, projected net absorption of 2.5 million square feet is expected to exceed the 1.7 million square feet of new space that should complete by year-end, with total lowering total vacancy to 5 percent."

Demand for industrial space is increasingly being driven to the southern and northern regions of San Diego County. According to James Duncan, senior associate with Burnham Real Estate, "the limited supply and high cost of land in most of the popular mid-city and mid-county markets, makes industrial development far more feasible in areas like Otay Mesa, San Marcos and Oceanside."

Otay Mesa leads San Diego County in new construction, with 648,100 square feet under way in several new projects. These include One Piper Ranch and Opus Crossing. "The average size of these buildings is 31,000 square feet - reflecting the increasing number of small- to mid-size build-to-suit-to-own facilities," said Holder, who specializes in the South County marketplace. The largest building under way in Otay Mesa is a 248,116-square-foot facility in Siempre Businesss Park, half of which has already been pre-leased by Reef.

Commiserate with the increased amount of new construction in Otay Mesa is a similar gain in net absorption. For the quarter ended March 31, 2005, Burnham Real Estate shows that Otay Mesa absorbed 214,694 square feet of space, a number that will increase as newly completed space is subsequently occupied.

"The entire South County region is showing improved leasing activity," said Holder. "Chula Vista recorded 229,661 square feet of net absorption in the first quarter, activity that was accounted for by the purchase of the L Street Industrial Center by Sweetwater Union High School."

The popular mid-county submarket of Sorrento Mesa reports 353,000 square feet of new construction in four buildings that comprise the first phase of the new Biosite campus in Fenton Technology Park. Completion is expected sometime in the second quarter of this year.

"Sorrento Mesa has really seen a marked improvement, with current vacancy of 11.7 percent down significantly from its peak of 13.8 percent in 2001," notes Duncan. "Vacancy on total Sorrento Mesa inventory is just 8.7 percent, signaling that the area is well on its way to supply and demand balance. Also, the fact that high land prices should preclude new industrial construction should help the market tighten even further."

Along the I-15 Corridor, the Toppan Electronics expansion is adding 370,000 square feet of space that will be complete and ready for occupancy next month. During the first three months of the year, Poway recorded 130,000 square feet of net absorption - the highest amount of activity recorded by any of the I-15 Corridor markets. "This activity was due to a high level of multi-tenant activity, which helped remove available space from the market in several projects," said Duncan. "Vacancy in Poway stands at 9.6 percent on total competitive inventory, and at just 6.9 percent based when owner-user facilities are included."

Farther to the north, in San Marcos, 205,313 square feet of net first quarter absorption helped lower vacancy to just 4.6 percent, the lowest vacancy of all the Highway 78 Corridor submarkets. Currently, only 26,500 square feet of new space is under construction.

The R&D market is beginning to show signs of recovery after several years of poor performance. In 2004, there was 820,000 square feet of net R&D absorption - the sector's highest level of activity since 2000. This has helped lower vacancy on total leasable inventory to 14.1 percent, down from 15.2 percent just three months ago. The vacancy rate including owner-occupied buildings is an even lower 10.7 percent.

"Already in 2005 there has been 207,000 square feet of net R&D absorption," said Duncan. "Given leases that have been signed and are pending occupancy, this puts the R&D sector on track to match, if not exceed, last year's activity."

Torrey Pines recorded 172,500 square feet of net absorption during the first quarter of 2005, 75,000 square feet of which was accounted for by the Burnham Institute which leased some of the space vacated by Biogen-Idec in Fall 2004. Biogen-Idec has relocated into its new 364,019-square-foot facility in UTC, however, only 16,316 square feet of this space is classified as R&D. Another lease for 81,000 square feet by Metabasis Therapeutic will add to the total 2005 net absorption when occupancy occurs later this year.

Kearny Mesa and Miramar - two of San Diego County's more mature R&D markets - also are reporting improved R&D leasing with 125,000 square feet and 93,000 square feet of net absorption, respectively, during the quarter.

For more information, visit www.burnhamrealestate.com.

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