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San Diego's office, industrial and retail markets looking strong

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San Diego's office market may have stumbled briefly last year, but it has come back strong, and so have the industrial and retail markets. In a recent survey, Gary Baragona, CB Richard Ellis (CBRE) senior management coordinator, said that while the problem may be most acute in downtown San Diego, the entire county has a critical shortage of office space.

Baragona found there were only four contiguous office spaces of more than 50,000 square feet and no contiguous office spaces of more than 70,000 square feet anywhere in the county. If such a large office user has an immediate requirement, Baragona says they are simply out of luck.

To counteract such a problem, two developers have begun downtown high-rise office buildings. Lankford & Associates Inc. broke ground last December on its Broadway 655, a 23-story, 410,000-square-foot building at Kettner Street and West Broadway.

The $140 million project will be the first downtown office high-rise since nearby One America Plaza opened in 1991. Construction is expected to be completed and first tenants will be occupying the building in mid-2006. Law firm Milberg Weiss Bershad Hynes & Lerach LLP will occupy more than 135,000 square feet of the top seven floors of the building.

Other major tenants include the law firms Best, Best and Krieger LLP and Peterson & Price. The building is slightly more than 50 percent pre-leased.

Lankford said there will be between 175,000 and 180,000 square feet of usable space remaining in the office portion, leaving enough for a company to have five or six floors of contiguous space. Lankford said the mixed-use development will include 356,000 square feet of office space, parking for 765 cars, 16,677 square feet of restaurant and retail space, and a four-story residential component.

Kraig Kristofferson, a CBRE senior vice president, said the new 300,000-square-foot DiamondView Tower is expected to break ground before the end of the year just beyond the right field wall of Petco Park. With 264,000 square feet of office space floorplates from 27,000 to 33,000 square feet at the base to about 16,000 square feet at the top.

Kristofferson said floorplates of about 19,000 to 20,000 square feet are about typical for downtown. Kristofferson said another benefit of DiamondView is it will have a 3 1/2 to 4 space per 1,000 square feet parking ratio.

CBRE's Bret Gossett, who specializes in investment properties, said speculative office development is not only occurring in downtown, but in Point Loma, Mission Valley and Del Mar Heights.

"We're starting with an availability of 12 percent on a direct basis. That's pretty healthy, and it's now being followed by new construction," Gossett said.

Gossett suggested it will likely be a while before Sorrento Mesa sees some new construction, given that its office vacancy rate is still about 35 percent.

Kristofferson said even this market will turn around, but tenants may be calling the shots for a while.

"It's going to be a rent-driven market, and the tenants will be looking for long-term leases," he said.

Stephen Holland, a CBRE vice president of global corporate services, said San Diego doesn't have nearly the amount of sublease office or industrial space that it had a year ago. A notable exception will be Gateway's (NYSE: GTW) lease of its 135,000-square-foot headquarters in Poway, which it plans to vacate with its move to Orange County this summer. This lease doesn't expire until 2011.

Meanwhile, Holland said there are a lot of other forces in the market, including Biogen/Idec (Nasdaq: BIIB) moving out of 300,000 square feet in the Torrey Pines area into larger facilities nearby.

"There are eight or nine (biotech) IPOs in the queue," Holland said.

While these could take some of that research and development space in the area, they might not all succeed, and/or it may be a while before they can fill the buildings.

With vacancies in the single digits, things are looking very tight on the industrial side as well. Lannie Allee, another CBRE senior vice president, said it doesn't help that there are very few places left to develop industrial parks in the North County in particular.

The Bressi Ranch in Carlsbad has 130 acres, Carlsbad Oaks North has 140 acres, and Carlsbad Raceway has 75 contiguous acres, but Oceanside's Ocean Ranch development is nearly built out, and there are only scattered pieces in the final phase of that city's Rancho del Oro Technology Park.

On the investment side, CBRE's Nicholas Psyllos said investment capital for new projects or acquisitions may now be found almost anywhere.

"Investors are coming out of the woodwork. We are one of the top three areas for investment capital," he said. "The fundamentals look very good."

Psyllos said the lack of land, double-digit rent growth in many sectors, low cap rates, and very low interest rates make this an extremely attractive investment target. He recalled that he had 25 offers on an industrial building in Vista, and 17 of those offers were very strong.

One of San Diego's hottest investment sectors is the multifamily housing market. J. Kevin Mulhern, a CBRE first vice president who specializes in this area, said we continue to be one of the strongest multifamily markets in the country, along with south Florida and northern Virginia. Mulhern said the biggest thing happening right now is condominium conversions.

"Condo conversions are off the charts. One out of every two sales is a conversion," he said. Mulhern said this trend is generally a good thing because it provides entry level housing here that is in the $200,000 to $300,000 range, compared with new single-family home process that generally aren't priced less than $400,000. He does admit, however, that conversions do take properties away from an already depleted rental housing stock.

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