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Rents are on the rise

San Diego County office leasing increased through 2014

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Office leasing overall in San Diego County continued to improve last year, although there are soft spots, according to reports by JLL, Newmark Grubb Knight Frank, Colliers International and CoStar Group Inc.

Colliers reported 486,918 square feet of net absorption in the fourth quarter and more than 1.7 million square feet of net office absorption for 2014.

This ranked 2014 with the most absorption during the past nine years, Colliers reported.

JLL reported 997,067 square feet of net absorption in 2014, which included 224,903 square feet in net absorption in the fourth quarter.

CoStar (Nasdaq: CGSP) reported that net office absorption was 886,295 square feet in the fourth quarter.

"The absorption trend continues to be consistently positive, with 18 of the prior 19 quarters driving vacancy rates steadily downward," Colliers wrote. "The overall countywide vacancy rate dropped 59 basis points during [the fourth quarter] to end the year at 12.2 percent."

By all accounts, downtown San Diego, which about 2 million square feet of vacant space, depending on the survey, is waiting for tenants.

That situation could worsen when Sempra Energy (NYSE: SRE) vacates more than 347,000 square feet at 101 Ash St. to move into 320,000 square feet at 424 Eighth Ave. sometime this summer.

Demand was essentially flat in 2014 in downtown San Diego's central business district. That district’s net absorption of 11,263 square feet in the fourth quarter evened out 2014 activity to 281 square feet of negative net absorption, Colliers wrote.

The JLL fourth-quarter report said there is a lot to like in the year-end numbers, which were fueled by the addition of more than 43,000 nonfarm jobs last year.

Professional and business services recorded the greatest year-over-year gain, adding 13,300 jobs in November. Professional, scientific and technical services contributed to more than 60 percent of the job growth in this sector.

"This steady job growth, especially in office-using employment, points to continued demand for office space in the future," JLL reported.

The past year was also a very good one, by Newmark Grubb Knight Frank's accounts.

"The close of 2014 marked a year of robust expansion for the San Diego office market," it reported. "Fourth-quarter vacancy fell to 13.7 percent, down 30 basis points from the prior quarter and 470 basis points from year-end 2010."

JLL (NYSE: JLL) put the countywide office vacancy rate at 14 percent, but CoStar reported a significantly better 11.2 percent.

CoStar said the Class A vacancy had reached 9.8 percent as of the end of 2014. Colliers was in the middle at 12.2 percent.

Disparities in vacancy numbers may be attributable to a variety of factors, including the parameters of a sample and whether a leased but empty space is considered occupied.

CoStar reported tenants vacating large blocks of space in 2014 included JPMorgan Chase (NYSE: JPM), out of 126,000 square feet in Rancho Bernardo at 10790 Rancho Bernardo Road; LPL Financial (Nasdaq: LPL), moving out of 105,358 square feet at Towne Centre Tech Park in UTC; and Latham Watkins leaving 77,147 square feet at One America Plaza in downtown San Diego.

CoStar reported tenants moving into large spaces in 2014, including LPL Financial, into 414,570 square feet at La Jolla Commons Tower II in UTC; Entropic Communications Inc., into 132,600 square feet at 6350 Sequence Drive in Sorrento Mesa; and Rady Children’s Hospital San Diego, into 80,281 square feet at the Copley Corporate Center in Kearny Mesa.

Along with sizable differences in vacancies, the different brokerages had a wide range of net absorption figures. All seemed to agree that rents are climbing.

"Rents continued on their upward trajectory, increasing 6 percent year over year, as the supply of large blocks and high-end Class A space continued their decline. This quarter marks the 10th straight quarter of positive rent growth," JLL reported.

JLL and Newmark Grubb Knight Frank reported that the average asking rental rate was $2.33 per square foot per month. CoStar reported the rate was $2.35 per square foot per month, while Colliers put the figure at $2.29.

"While there remain areas of value and opportunity in lower-demand submarkets, as well as in older office space across the market, quality Class A space remains scarce," JLL added. "In fact, the direct vacancy rate has reached the single-digits for this asset at 9.9 percent, the lowest level in almost 10 years."

Newmark Grubb Knight Frank said that although Class A space was scarce, it still represented 78 percent of the net absorption in the fourth quarter.

The strongest demand for Class A office space came from University Towne Centre, where the year-to-date Class A absorption totaled 350,215 square feet, it said.

JLL noted that the end of 2014 marked the beginning of 558,164 square feet of speculative construction, with the largest of these projects being The Irvine Co.'s 306,000-square-foot One La Jolla Center going up in the University Towne Centre submarket.

That building is expected to be completed by early next year.

"As of yet, there is no word on preleasing activity, but the new construction will help to alleviate the supply constrained office market," JLL said.

Another sizable building under construction is the 177,269-square-foot Make Project by Cruzan Monroe, on the former Carlsbad Floral Trade Center site in Carlsbad.

Another project on a smaller scale is Kilroy Realty Corp's (NYSE: KRC) 74,000-square-foot building within its development in Del Mar Heights.

CoStar reported that through the first three quarters of the year at least, the county saw 42 office sales transactions with a total volume of $704,787,950.

During the same period in 2013, the market posted 42 transactions with a total volume of nearly $578 million, according to CoStar.

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