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Small businesses drive San Diego office market

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While large companies often get the most attention, smaller users have become the driving influence in local real estate markets.

Yale Properties, the owner of Kearny Mesa Complex, one of the best located multi-tenant parks in San Diego County, has spent the last year creating a condominium map for this approximately 152,000-square-foot industrial and office project. Sales have begun for Phase I, with an estimated closing date of December 2005. Interested parties should contact CB Richard Ellis.

Rick Sparks, executive vice president of CB Richard Ellis (NYSE: CBG), recently reported at the National Association of Industrial and Office Properties' Market Snapshot that nearly 98 percent of San Diego businesses have fewer than 100 employees and 94 percent have fewer than 50 employees.

"The majority of San Diego's work force is made up of thousands of small companies," said Mark Read, senior managing director of the San Diego regional office of CB Richard Ellis. "These companies need a place to call home and while they may not be household names they are one of the most important parts of our economy."

According to Read the myth that San Diego, with its high cost of living, has become a bad place for business is unfounded.

"The reality is that San Diego is well positioned to be an incubator for businesses, especially entrepreneurial ones," he said. "If you look at the demographics, San Diego is a great place for small businesses. The industries and companies that thrive here are small, but they are high paying."

While the small high-paying companies likely will stay in San Diego, the economic factors in San Diego likely will push out the type of businesses that must pay low wages, such as call centers.

"As San Diego expands with smaller companies, the need for smaller office/R&D space has also risen," Sparks said. "The small companies expand like a growing garden. They just keep growing."

Often smaller businesses grow by way of venture capitalists or by being purchased by larger companies. As they add staff, these companies also must increase their office/R&D space, Sparks said.

"They [small businesses] become infused with capital," Sparks said. "This capital infusion creates jobs and catalyzes absorption of office/R&D space."

The demand for office/R&D space has turned the business condominium market "red hot," Sparks said, adding that many office/R&D condos are selling out before they even break ground.

As a response to the high lease rates and low interest rates, many small businesses are choosing to purchase office condos, allowing them to own their own space and gain long-term control over their workspace expenditures.

"I don't ever remember a time when we had waiting lists for commercial properties," he said. "The market will always have its ups and downs, but the San Diego economy reinvented itself in the '90s and we are much more diversified now. We have a lot of entrepreneurs in San Diego, so the outlook is good for office/R&D real estate."

Mission Valley and Sorrento Mesa have become popular spots to renovate older, functionally obsolete buildings into office condominiums.

"Several property owners are following this trend, taking their older properties, which have outgrown their commercial value, and redeveloping them into office condominiums," said Jeb Bakke, a senior vice president with CB Richard Ellis.

"Many small companies, whose needs are somewhat stable, are now very interested in buying office condos," he said.

Companies can realize numerous advantages from buying an office condominium, especially companies that occupy 5,000 to 7,000 square feet or fewer.

"Interest rates are very low and by purchasing an office condo, they are diversifying the asset base of their company," Bakke said.

Companies also are turning to office condominiums because it helps them forego any future rental expense increases, which are likely to continue to go up over time. Many companies also are receiving advice from their financial planners and CPA's who are encouraging them to purchase office condominiums for tax reasons.

"The last time period for demand in office condominiums began appearing in the mid-80's, but has not resurfaced until about two years ago," Bakke said. "We are starting to see a wave again."

Craig Shute is managing director of CB Richard Ellis

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