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San Diego's major suburban office markets performing strong

While downtown San Diego's office market gets much of the attention, plenty is happening in the suburban office markets as well.

The flurry of activity from Mission Valley to University Towne Centre to Del Mar Heights to the Interstate-15 and state Route 56 corridors was made apparent during a joint meeting of the San Diego Building Owners and Managers Association and the Institute of Real Estate Management at the La Jolla Marriott this week.

Andy LaDow, a broker with Grubb & Ellis|BRE Commercial, said Mission Valley's office development will be fueled by residential construction in a pattern similar to downtown San Diego.

He said Mission Valley, which had 4,900 residential units in 1990, had 7,600 units in 2000 and 8,900 units as of the end of 2004. This figure is expected to climb to 10,900 units by 2010. And like downtown San Diego, Mission Valley's residential development is multifamily.

Two new office buildings have been brought on line in Mission Valley and both are in escrow. One is the 83,644-square-foot Rio Vista Plaza III development at 9095 Rio San Diego Drive. That project with 79,744 square feet of rentable space is in escrow to a BlackRock (NYSE: BAT) entity.

BlackRock is one of the largest publicly traded investment management firms in the United States with $391 billion in assets under management as of March 31, 2005.

The other building is Rio San Diego Plaza II, a 75,525-square-foot (73,090 square feet rentable) building at 2275 Rio Bonito Way. That building is also in escrow to the San Diego County Employees Retirement Association.

Mission Valley, despite being a market with a lot of older space, has managed to maintain vacancy rates of less than 10 percent for the past few years. LaDow said the rate is expected to decline from between 7 percent and 8 percent currently to less than 5 percent next year.

Large recent lease transactions in the valley include Commonwealth Title for 31,445 square feet in Centerside II, CACI Technologies for 29,802 square feet in Pacific Center I and the Base and Realignment Commission for 28,000 square feet in Pacific Center I.

Moving to the University Towne Centre, Del Mar Heights, Sorrento Mesa and Sorrento Valley areas, Mark Wayne of Burnham Real Estate Services said the UTC area has the best office properties, Sorrento Mesa and Sorrento Valley continue to hold the high technology market and Del Mar Heights has great advantages because it is north of the Interstate 5/Interstate 805 merge.

Wayne says that the supply of office space in Del Mar Heights has tripled (to 3.55 million square feet by Burnham's accounts) in nine years. Except for that period in and around 2001 when Peregrine Systems' bankruptcy dumped hundreds of thousands of square feet back on the market, the absorption has kept up with all the construction.

Wayne says the Del Mar Heights market is only three projects away from build-out and those are either already under construction or will be within the next 18 months.

Between 1.5 million to 2 million worth of office construction has been planned in the UTC market area. Wayne said a possible issue here are the airport overlays as they may be applied by the San Diego Regional Airport Authority with regards to Marine Corps Air Station Miramar.

"Building heights might be lower than expected because of the new airport regulations," said Wayne. "There could be a maximum height of 50 feet depending on your location."

As for current vacancies, Wayne said Del Mar Heights had an 11 percent rate as of the end of the first quarter, UTC had a 12 percent rate and Sorrento Mesa had a 16 percent rate.

These rates are expected to decline further as more space is taken down. Most of this space is expected to be taken by existing tenants such as Qualcomm (Nasdaq: QCOM), which is expanding its presence in the area.

"All three of these markets (UTC, Del Mar Heights and Sorrento) have heavy activity. There is more competition for space and even inferior space is leasing well," Wayne said.

The full-service lease rates are as high as $3.50 per square foot plus utilities for Class A space in Del Mar Heights, perhaps slightly more than $3 for Class A space plus utilities in the UTC market and as high as $2.60 for Class A space plus utilities in Sorrento Mesa.

When the three markets of Del Mar Heights, UTC and Sorrento Mesa (including Sorrento Valley) are combined, Wayne said they accounted for 950,000 square feet of absorption, or some 77 percent of the county's total in 2004.

In the first quarter of this year, these three markets absorbed about 150,000 square feet or 38 percent of the county's total net absorption -- showing they remain a major factor in the county totals.

It should be noted here that Sorrento Mesa had 1.12 million square feet of office construction under way as of the end of the first quarter, according to Burnham, so this could be a factor in future totals.

Moving to the Interstate 15 and state Route 56 Corridors, Jeb Bakke of CB Richard Ellis said 2005 is going to be a banner year in terms of construction and absorption.

Bakke added that the opening of 56 last year has pushed rates up. They are running at about $3 per square foot in the state Route 56 Corridor where plans are gearing up for two office projects. The rates are a bit lower ($2.50 to $2.95) in Rancho Bernardo, $2.35 plus utilities in Poway and $2 to $2.25 in Scripps Ranch.

Bakke said tenants in I-15 and state Route 56 can't expect too much in the way of concessions and suggested the calm before the storm may actually be calm before the hurricane as several big deals are slated to close soon.

Intuit (Nasdaq: INTU) will be consolidating its space along the I-15 Corridor, pre-leasing 365,000 square feet of the planned 466,000-square-foot Santa Fe Summit project between Carmel Valley and Rancho Penasquitos.

Santa Fe Summit developer Kilroy Realty (NYSE: KRC) of Los Angeles incidentally recently paid $24 million to acquire 11 acres of adjacent property to make its project even bigger.

Del Mar Heights-based Sea Breeze Properties is preparing the ground for its adjacent 680,000-square-foot Plaza 56 project.

Bakke said that a defense contractor he declined to name is looking to either develop or move into some 500,000 to 600,000 square feet of space. That contractor, he says, because of stiff competition, may be wise to look at redevelopment opportunities.

"ST Microelectronics tore down a building and is building a new one. Unisys (NYSE: UIS) is doing the same in Rancho Bernardo. Older chip plants being converted in the I-15 corridor," Bakke said. "This will be the trend as land becomes harder to find."

Related Article:

Commercial real estate market seen improving through 2006 (June 15, 2006)

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