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Commercial space calculations a hot issue among local firms

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A debate over commercial space and sublease space and how it is being calculated appears to be heating up. The topic came to the fore during a roundtable discussion hosted by The Daily Transcript on Sept. 14.

Jim Spain, a Colliers International managing director, and David Marino, a tenant-only principal with Irving Hughes, spent time deliberating the issue.

Spain said while there has been a marked decline in housing activity, the slowdown -- if it is coming -- has yet to hit the commercial real estate market. Marino doesn't agree.

Marino said there is some 4.1 million square feet of sublease office, industrial and flex space in the county, a figure he says is up from about 3.5 million square feet a year ago.

While the Irving Hughes' tally includes three types of space, Marino suggests that sublease space is still often under-calculated when pure office space is considered alone. Also, with companies such as Memec, Nokia and Intel returning space to the market, this may only get worse.

"And, 5.2 million square feet of office, flex and industrial space is slated to slam into the market in 2007," Marino said. "There's a ton of space coming online in 2007 and still some more space is coming online in 2008."

Spain said sublease space amounts to less than 1 percent of the total.

"Dave's coming out full doom and gloom," Spain said. "I think this is paradise compared to 1994."

Looking at the different markets, Marino said the overhang of total space equates to a 23.7-month level of office inventory in the Interstate 15 corridor and that markets such as University Towne Centre, Del Mar Heights, Carlsbad and Sorrento Mesa are also seeing significant surpluses due to all their sublease space.

Irving Hughes reports that Del Mar Heights has about 11.3 months of inventory, University Towne Centre has 23.4 months, Carlsbad has 19 months and Sorrento Mesa has 17.5 months of office inventory.

Sorrento Mesa, for example, will be negatively impacted when Cardinal Health vacates. North University City will feel the effects when Intuit leaves its space to consolidate operations on the state Route 56 corridor.

"If you look at the whole story, I think 2007 is going to be a very, very tough year for landlords," Marino said.

Steve Rowland, investment specialist, principal with Grubb & Ellis|BRE Commercial, said the millions of square feet of space that is coming online is a testament to the fact that landlords are convinced they will be able to command the rents necessary to make their properties work.

Stath Karras, CEO of Burnham Real Estate, said while he agrees there will be a bit of a slowdown, he doesn't think the market will be overbuilt.

"We had our best year ever in 2005, and it has been a 10-year upside," Karras said.

Marino said there is also a plethora of available highly specialized space, such as wet labs for biotechnology firms that may now be outsourcing much of their research. He added that about 12 to 14 buildings containing wet labs in the Torrey Pines area alone that could go empty for a very long time.

In the meantime, standard office space has been slow to lease in downtown San Diego. Irving Hughes reports about 6,000 square feet of net office absorption occurred downtown through the first half of the year.

However, Lankford & Associates' 365,000-square-foot Broadway 655 project is now about 89 percent leased, according to Marino's calculations.

Cisterra Partners' DiamondView Tower, which overlooks Petco Park's right field, quickly landed Cox Communications, Comerica Bank and CB Richard Ellis as tenants, but the rest of the tower's space has been slow to lease.

"DiamondView is having a tough time," Marino said. "It isn't close to the courts and people have the perception -- whether real or imaginary -- that they will have to compete with the ballpark traffic."

Kraig Kristofferson, a CB Richard Ellis senior vice president, said while DiamondView Tower's occupancy has been at 34 percent for quite a few months, he is not worried about getting the last 160,000 square feet filled.

"When you look at Lankford's building, you can tell that this is really a very tight market," Kristofferson said. "The building won't get done until next March, but you ought to see the views ... Not just into the ballpark, but to the city and the bay."

Kristofferson, who said the rates will range from about $3.25 to $4 per square foot, said he doesn't believe the distance to the courts will be a problem because DiamondView will have its own shuttle service.

Kristofferson added that while sublease space may be a major problem in places such as Sorrento Mesa and Del Mar Heights, it is not a problem downtown.

Mission Valley's office market continues to be an odd combination of new space and space that dates back to the 1960s.

"That's why Mission Valley didn't get crushed like some of the other markets," Marino said.

Karras, who said that half the office buildings along Camino del Rio South went into foreclosure during the 1990s, said the Mission Valley submarket appears to be much healthier this time around.

"Diversity really serves that market well," Karras said.

The brokers said the jury is still out on how the eventual 1-million-square-foot Sunroad Centrum project at the San Diego Spectrum will fare. The initial 329,000-square-foot phase topped out last month.

"I think tenants paying over $3 for that space could be a stumbling block," Marino said.

Rick Vann, Sunroad Enterprises real estate division president, said marketing for Centrum is just getting under way. Completion is expected late June 2007.

"It's a true Class A building; it has excellent freeway access and it's within this whole community at the (San Diego) Spectrum," Vann said. "We're very bullish on this project."

Other roundtable participants, hosted by Executive Editor George Chamberlin, included Mark Riedy, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego; American National Investments CEO Gina Champion-Cain; and Jerry Jacquet of Meissner Jacquet Investment Management Services.

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