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Office rents skyrocket in North County submarkets

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Ron Miller, a tenant adviser for Colliers International, said that while landlords enjoy the rewards of the improving economy, low vacancies and limited Class A office space, tenants are seeing rents skyrocket in some North County markets.

Miller said a consulting firm -- which he did not identify -- that leased office space in University Towne Centre’s Aventine for $2.85 per square foot per month in mid-2012 was recently told its new market rate would be $4.25 per square foot.

"This is almost 41 percent higher than their scheduled monthly rate in the last year of their existing lease," Miller said, adding that such increases are difficult for most firms to stomach.

Miller said even Class B office rates are more than $3 in such submarkets as University Towne Centre and Del Mar Heights.

Miller said law firms that signed long-term leases several years ago when “free rent” helped subsidize their relocations have been brought back to reality with current market rents that accelerate as their leases mature.

Miller said four law firms exploring full-floor lease options in Carmel Valley and UTC should not be shocked by Kilroy Realty's Corp.'s (NYSE: KRC) The Heights Del Mar's $4.90-plus asking rate, American Asset Trust's (NYSE: AAT) Torrey Reserve $4 triple net rate or The Irvine Cos.' One La Jolla Center's $4.50 full service asking rate.

"This is because they provide opportunities to have new offices in a first-generation building while incorporating a customized workplace where they can accommodate more people in less space," Miller said.

The Irvine Co., which controls more than 65 percent of the University Towne Centre Class A office market, is nearing completion of the 305,000-square-foot One La Jolla Center with asking rents in the mid-$4-per-square-foot range.

Neustar, a cloud computing firm, has committed to the entire fourth floor (about 22,800 square feet) of the 15-story tower. Neustar, which will be moving from Carmel Valley in June 2015, is already accustomed to paying $4-plus per square foot at Gateway at Torrey Hills office building.

Brian Starck, a DTZ managing director, said the One La Jolla Center isn't the only major speculative office project going up in the UTC submarket. Alexandria Real Estate Equities (NYSE: ARE), one of the nation's largest life science REITs, is planning two buildings consisting of 149,000 square feet at 9625 Towne Centre Drive.

David Odmark and Brett Ward of DTZ are handling the leasing along with Starck. The project is expected to be completed in the first quarter of 2017.

With a 4.8 percent direct vacancy factor, Miller said there are six buildings in UTC with asking rents higher than $4 per square foot. In Carmel Valley, with a 7.4 percent direct vacancy factor, there are more than 10 buildings with $4-plus rents.

Kilroy Realty, which owns about 40 percent of the Carmel Valley Class A office market, is also well underway with The Heights Del Mar. The delivery date is expected at the end of the year.

This Class A project totals 73,000 square feet and is under construction with expected delivery in October. This is the only speculative office building under construction in Del Mar Heights.

"Del Mar Heights has an 8 or 9 percent [office] vacancy rate and the rents are going up among all product types," Starck said, adding that some developments in Del Mar Heights could see rents pushing $5 per square foot over the next couple of years as existing space is leased.

Kilroy also hopes to develop an additional 480,000 square feet of office space at its One Paseo mixed-use development at El Camino Real and Del Mar Heights Road depending on what happens with signature-gathering campaigns for or against the project.

Meanwhile, Miller warns that those who delay securing their new office lease risk valuable time to thoroughly identify opportunities in their price range.

"With landlords achieving higher rents and corresponding longer lease terms, it bodes well for the next wave of speculative office developments in North City West," Miller said.

As effective rental rates rise, Miller said opportunities exist for tenants.

"There is a widening delta between the newer Class A office buildings and older Class A [and] Class B office buildings, where the rent difference can be up to 50 percent," Miller said.

Miller added that there are many sublease opportunities where tenants may find significant discounted rent rather than leasing directly from landlords.

Recent examples are Brain Corp., subleasing a full floor from Santarus; and Acadia Pharmaceuticals, subleasing two floors from Trion Worlds, both in Kilroy Centre Del Mar.

These subleases included free high-end furniture, fixtures and equipment and a 33 percent rent discount, compared with negotiating a direct lease with Kilroy.

"We're a pretty product-constrained market," Starck said. "But with companies like Kilroy, Alexandria and The Irvine Co. building these incredible projects, it should ease things up just a little."

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