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SD office, retail markets poised for growth, industrial still weak

While San Diego County’s office, retail and multifamily markets are expected to outpace the nation as a whole, the same can’t be said for the local industrial sector.

According to a PricewaterhouseCoopers (PwC) report, San Diego County’s office market is projected to be in a recovery mode through 2013 before heading into a modest expansion in 2014 and a further strengthening the following year -- suggesting that at least some speculative construction may not be too far away.

"This market appears to be getting closer to a true recovery," observed a survey participant.

The survey said San Diego’s office market should somewhat outpace the rest of the nation by 2015.

The PwC report says the price of office buildings in San Diego County, which had been running at well below replacement costs during the depths of the recession, reached an average of 85.8 percent of replacement cost during the fourth quarter of 2012.

Sales have definitely picked up.

Through the third quarter of 2012, office sales volume here was up nearly 24 percent higher than the same 2011 period, according to Real Capital Analytics.

The office tower sales have been coming quickly.

A joint venture of Lincoln Property Co. and Angelo Gordon & Co. paid $49 million for the 359,218-square-foot 600 B St. property in the core of downtown San Diego earlier this month.

In late November, Emmes Master Services of New York City, paid $135 million for the 553,715-square-foot Columbia Center office building at 401 West A.

A joint venture of San Diego’s CruzanMonroe and Cigna (NYSE: CI) in October teamed up to buy the 305,255-square-foot DiamondView Tower office and retail complex overlooking Petco Park from Dutch firm Wereldhave, which is divesting all of its U.S. holdings.

Weraldhave owns the office tower at 655 Broadway that will also be sold.

As strengthening fundamentals and positive economic trends buoy the San Diego office market, most survey participants expect office building values to increase during the next 12 months.

Filling space in these buildings requires jobs and San Diego’s job growth still shows an uneven recovery.

The PwC report noted that 5,900 new jobs were added to the professional-and-business-services sector during the first nine months of the year.

“Job growth in office-space-using sectors such as professional-and-business-services … is driving the recovery of the San Diego office market,” the report added.

Not every sector fared so well.

The financial activities sector in the county added a relatively anemic 120 new jobs during the same time period according to the U.S. Department of Labor. Still, it was a significant improvement over the job losses here during the recession.

There has been sufficient job growth, coupled with limited additions to supply, and ongoing demand for particularly Class A office space, to bring the overall vacancy rate to 14.7 percent here in the third quarter of 2012, according to Cushman & Wakefield.

That overall vacancy had been 16.2 percent in the third quarter of last year.

Getting space leases is a different matter.

San Diego-area office space is vacant an average of 10 months. The range nationally ranges from seven months in Washington, D.C. and Manhattan to 11 months in Phoenix and Charlotte -- putting San Diego’s near the top of that range.

The tenant improvement (TI) allowances for office space vary widely by area and the type of building.

PwC pegged San Diego’s average TI allowance at $40.63-per-square-foot. Nationally the rates range from $31.50 in Philadelphia to $67.50 in Manhattan and Washington, D.C.

San Diego County’s retail market, which took a hit as did the rest of the country during the downturn, appears poised to be in a strong recovery mode between now and the end of 2015.

PwC says the retail recovery will be more modest on the national front. The report says the U.S. recovery for retail space won’t begin to happen until 2014, followed by a modest recovery after that.

Even if the retail market doesn’t recover quickly enough for existing landlords, projects such as the 270,000-square-foot retail portion of the La Costa Town Square development in Carlsbad (Safeway subsidiary Property Development Centers is the builder) may be well timed for a rebound. It is projected to open in July 2014.

Both San Diego and the nation’s multifamily market are projected to continue to be strong for the foreseeable future.

While thousands of units of future supply have been projected in the county during the next few years, the PwC report says this region’s apartment market should remain strong through 2015.

It appears the eventual 1,800 Casa Mira View development by Garden Communities that is well under construction, will be the largest apartment complex coming out of the ground for the foreseeable future, but it is by no means alone.

For example, several hundred units are being planned in multiple projects at the San Diego Spectrum in Kearny Mesa and more 1,500 units are under construction in downtown San Diego -- depending on how many plans are actually realized in a world where redevelopment funds are unavailable.

If there is a weak sector for San Diego County it is industrial. Although Otay Mesa leased about 346,000 square feet of industrial space through the first nine months of the year, according to The CoStar Group, that still leaves about 2.6 million square feet of vacant space.

While the national industrial market is projected to start improving next year, San Diego’s isn’t projected to begin clawing its way back before 2014 -- largely due to the Otay Mesa space. By 2014 the industrial market is projected to be strong nationally and look a whole lot better here.

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