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SD high-tech growth aiding office space absorption

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In an expected pre-requisite of more leased commercial space, JLL (NYSE: JLL) reported that San Diego County' high technology cycle is in the early stages of growth.

San Diego shares its status with Orange County, Orlando, Pittsburgh, Indianapolis, Northern Virginia and even Detroit.

Detroit is in the early stages of growth, despite a municipal bankruptcy and debate over selling prized works of art to pay the bills. The city was rated slightly behind San Diego in terms of growth cycle.

The number is simply one of where a given metropolitan area is in its cycle, rather than overall health of that area.

San Francisco was at the highest point in the high-tech growth cycle with a 84.6 level indicating it may be much closer to its peak before that high tech market begins contracting once more.

While JLL didn't break out high tech office vacancy, it pegged the county's overall office vacancy at 18.7 percent as of the second quarter's end.

The report did say that 646,967 square feet of high tech space is under construction.

The construction figure doesn't include about 410,000 square feet that Qualcomm (Nasdaq: QCOM) is developing at 10001 Pacific Heights Blvd. near its headquarters in Sorrento Mesa.

JLL researcher Eileen Tumalad explained the building isn't included because it is for an owner-user.

While it wasn't clear just how much space Qualcomm will vacate in multiple locations once it relocates, it will have an impact. This is mitigated by numerous leases not expiring until 2017 or 2018, which will keep Qualcomm in many leased spaces.

Qualcomm already occupies more than 4 million square feet in owned and leased space in Sorrento Mesa and Sorrento Valley, along with hundreds of thousands of mostly leased spaces scattered around the city, but Qualcomm is just part of the story.

"San Diego is home to high tech tenants in industries such as software, microchip manufacturing, and wireless technologies with a diversity of firms in various stages of the business lifecycle …" JLL writes. "Landlords are embracing the space requirements of high tech tenants by proactively building out space with exposed ceilings and open floor plans, which in part, provides limitless options for tenants in incubator spaces."

The good news for San Diego office landlords whose buildings are suitable for high tech use, JLL said, is that "regional employment in the high tech sector has far outpaced other office-using jobs, boding well for ongoing growth in the market," JLL continued. "San Diego's well-educated labor force, extensive network of local universities and research institutions, and an environment where employees thrive all contribute to high tech's attraction to [the city]."
JLL said the problem for high-tech tenants is the dearth of large, contiguous spaces. This, coupled with the high cost of living and higher business costs, presents a greater challenge for the large firm that also may have specialized needs.

The 646,967 square feet of high-tech space under construction includes The Irvine Co.'s One La Jolla Center at 4655 Executive Drive in the University Towne Centre submarket.

JLL reported that three large high-tech leases taking place in the county between the second quarter of 2013 and the second quarter of 2014 in terms of square footage. Lease terms were available, but the transaction values were not revealed.

The largest of these was a seven-year renewal by Sony Computer Entertainment for 190,268 square feet at 9805 Scranton Road within the San Diego Tech Center in Sorrento Mesa.

Also within the San Diego Tech Center, at 9605 Scranton Road, was an expansion by Qualcomm into a 59,798-square-foot space for five years, which JLL ranked as the third-largest lease.

The second largest high tech lease by JLL's accounts was a renewal for Kontron America for 127,495 square feet for 60 months at 14118 Stowe Drive in the Stowe Business Center in the South Poway Business Park.

The CoStar Group (Nasdaq: CSGP) reported that lease that was renewed in the second quarter, is slated to expire on June 30, 2016. Kontron is a manufacturer of embedded computer technology.

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