A surge in third quarter leasing activity, including 633,000 square feet of space absorbed, virtually assures that the San Diego office market will reach -- if not exceed -- 2 million square feet of positive net absorption for the year, a Burnham Real Estate study shows.
The third quarter 2005 performance was the best single quarter since the same period in 2003, when 843,600 square feet was absorbed. It also accounts for approximately 40 percent of the 1,600,000 square feet of year-to-date net absorption, which already exceeds total 2004 activity by 16 percent.
"New inventory is driving this momentum, as tenants who signed leases in 2004 and early 2005 now take occupancy," said Mark Wayne, senior vice president and principal with Burnham Real Estate. "With demand keeping pace with new supply, the current vacancy rate of 11.7 percent on leasable inventory (excluding owner-user facilities) remains virtually unchanged from year-end 2004."
The Burnham Real Estate study shows that so far this year, 1,796,000 square feet of new space has been completed and another 596,513 square feet is expected to come on line by year-end.
"The good news is that the majority of this new inventory is being driven by firm tenant commitments for speculative and build-to-suit facilities," Wayne said. "This dynamic should continue well into 2006 and into 2007 as companies recognize the impact the current land shortage for new development will have on future supply and act now to secure space for anticipated future growth." Burnham Real Estate now tracks owner-user inventory and leasable inventory separately. Of the 73,337,502 square feet of total office inventory in San Diego, 11,970,000 square feet -- or 16.3 percent -- is owner-occupied.
Tom Van Betten, a vice president with Burnham Real Estate, notes that over the past two years there has been a shift in the composition of new inventory, with speculative development now accounting for 1,347,460 square feet -- or 75 percent -- of all new supply.
"The rise in speculative development is being driven by pent-up demand by companies who previously postponed expansion or relocation plans," he said. "Build-to-suits account for the balance of this new space (421,380 square feet)."
Since 2001, Burnham studies show that office vacancy in San Diego County has hovered consistently in the 11 percent range based on leasable inventory and in the mid-9 percent-range for total inventory, including owner-user buildings.
"Strong equilibrium between new supply and net absorption accounts for this stability," said Wayne. "With most of the 596,513 square feet of new space that will come on line in the fourth quarter already committed to, leasable vacancy could slip below the 10 percent threshold by year-end 2005. This would be only the third time in 15 years that the San Diego office market would realize single-digit vacancy."
Nearly 60 percent of the 2,800,000 square feet of new construction under way throughout San Diego County is located in the North City area. Of this, 1,422,785 square feet is located in Sorrento Mesa where two buildings totaling 850,000 square feet are being built for Qualcomm. Additionally, several projects are under way along the State Route 56 corridor.
"The North City area continues to be a very popular place to office, with close proximity to top executive as well as work force housing," said Van Betten. "The completion of SR-56 has been a huge boon to the I-5 and I-15 mid-county corridor markets, including Intuit's future campus now under construction at Kilroy's Santa Fe Summit located along SR 56 at Camino del Sur."
Individual submarket highlights of the Burnham Real Estate study are as follows:
Downtown -- During the third quarter, downtown San Diego welcomed the much-anticipated Broadway 655, the area's first new Class A high-rise in 14 years. Although over 75 percent pre-leased, the tower's completion still elevated downtown vacancy from 8.3 percent as of the second quarter to 11.3 percent today. Burnham expects this new space to absorb quickly, however, and downtown is well positioned to receive the new DiamondView tower across from Petco Park in 2006. The largest third quarter lease transaction took place downtown (coincidentally in Broadway 655), with Lerach, Couglin, Stoia, Geller, Rudman & Robbins LLC committing to 117,000 square feet.
Mission Valley -- Vacancy in Mission Valley has also increased this year, from 11.6 percent at year-end 2004 to 12.3 percent today. The second quarter completions of Rio San Diego Plaza II and Rio Vista Plaza II account for this slight upswing. Mission Valley traditionally ranks among the county's most stable office submarkets, supported by its central location, proximity to all major freeways, and booming residential and retail services development. There is no new construction in Mission Valley, and vacancy of the area's leasable inventory should decline to 12.1 percent over the next several months.
Kearny Mesa -- Kearny Mesa reports the lowest office vacancy rate of all major San Diego office submarkets -- just 7.6 percent on total leasable inventory and only 6.3 percent when owner-user buildings are included. The Burnham report shows that year-to-date net absorption of 350,220 square feet is well ahead of the 296,500 square feet of activity recorded for all of 2004. Kearny Mesa is home to the largest master-planned Class A office community in San Diego -- Sunroad Centrum. The 1 million-square-foot office campus breaks ground on its first phase in early 2006.
Torrey Pines -- Torrey Pines office vacancy has fallen more than 8 percentage points this year, from 22.9 percent at year-end 2004 to 14.9 percent today. This is the greatest decline reported by any San Diego County submarket in 2004. Over 178,000 square feet of net year-to-date absorption (including 9,828-square-foot lease by Scripps Clinic and a 20,160-square-foot lease by Torrey Pines Therapeutics), along with no new construction, is responsible for the market's improvement.
Del Mar Heights -- Del Mar Heights' vacancy rate continues to improve, aided by 213,840 square feet of net absorption in the second quarter alone. Most of this activity is attributed to small- to mid-sized transactions, which are keeping pace with the new inventory. The Burnham report shows that year-to-date net absorption of 362,227 square feet is nearly on par with the 388,740 square feet of new space completed so far this year. Newly completed projects include the 160,000-square-foot High Bluff Ridge at Del Mar (which is substantially leased by Morrison & Foerster). An additional 240,000 square feet is being built in the three-building Paseo Del Mar, which is scheduled for completion in May 2006.
UTC -- Overall office vacancy in North University City (UTC) continues to improve, falling from 12.6 percent in the second quarter to 12 percent as of Sept. 30. There has been no new construction in UTC since October 2004 when 347,703 square feet of owner-user space came online for Biogen Idec. As a result, 248,000 square feet of net absorption last year along with 55,700 square feet of 2005 year-to-date activity is helping the area regain supply and demand balance. Burnham Real Estate tracks inventory in UTC by two categories: traditional office and flex tilt-up, the latter of which is concentrated in the Eastgate area. Vacancy for traditional office is very low, standing at 8 percent for leasable inventory and just 6.9 percent when owner-user buildings are included. Tilt-up, on the other hand, reports 20 percent vacancy based on leasable inventory and 15.5 percent vacancy when owner-user buildings are included. Sorrento Mesa -- Sorrento Mesa leads the county in new construction, with 1,422,785 square feet under way. Qualcomm accounts for 850,000 square feet of this space in two new facilities with 10 and 12 stories each. Pacific Center III will add 141,000 square feet of speculative space to the market when it completes in late 2006. It will be followed by the new 292,000-square-foot build-to-suit for Gen-Probe. Third quarter 2005 vacancy in Sorrento Mesa stands at 16.3 percent, down from 17 percent three months ago. Year-to-date net absorption of 57,910 square feet includes 19,680 square feet of activity in the third quarter.
Carlsbad -- Carlsbad's continuing recovery is evident by just 11 percent vacancy on total leasable inventory. This compares to 18.4 percent just three years ago. Limited new construction has given this popular North County market a chance to regain balance. Over 766,000 square feet has been absorbed in Carlsbad since 2001, Burnham studies shows. This year, 108,110 square feet has already been absorbed, a number that should increase as another 29,000 square feet of construction is completed by year-end and another 190,000 square feet of new space is completed in 2006. Vacancy could increase slightly when this new space enters the market.
Scripps Ranch/Sabre Springs -- Vacancy in Scripps Ranch continues to stabilize, currently standing at 9.4 percent (compared to 35.8 percent in 2002). The area is seeing increasing demand from companies who want to locate along the popular I-15 Corridor near well-established residential areas. Currently, 171,500 square feet of new space is under way, including the second building of Monarch Corporate Center (60,000 square feet) and the 112,000-square-foot Plaza at Scripps Northridge that will finish early next year. In 2006, Kilroy Realty will break ground on the 141,000-square-foot second phase of Kilroy Sabre Springs.
For more information on Burnham Real Estate, visit www.burnhamrealestate.com.