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Mission Valley market continues to perform well as third quarter approaches

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Mission Valley is the most centrally located suburban office market in San Diego and continues to attract a large and expanding corporate tenant base. In the past several years, Mission Valley has proven to be a stable and growing market, demonstrated by consistently low vacancy and rising rental rates. Given the diverse tenant base, low historical vacancy, consistent space absorption and rising rental rates, the Mission Valley office market will continue to perform well as the third quarter approaches.

Mission Valley's area amenities, such as retail, fine dining, movie theatres, hotels, sports and recreation, and multifamily housing, as well as impeccable freeway access, will continue to draw tenants to the Mission Valley market despite the low vacancy rate and limited sites for further office development. Although there are currently no projects under construction, two new Class A office projects, San Diego Plaza II and Rio Vista Plaza III, were completed mid-2005 and are approaching full occupancy. To further illustrate investors' interest in the Mission Valley office market, these buildings were purchased while under construction and 100 percent vacant with prices close to $300 per square foot.

It is expected that Mission Valley Class A buildings will be in an excellent market position in upcoming years. Lease rollover is lower than historical numbers, with approximately 235,000 square feet expiring in 2007 and 200,000 square feet expiring in 2008. In addition, there is minimal new product coming online in the short term, with only one significant spec project for approximately 100,000 square feet scheduled to break ground later this year.

Currently there are only 225,000 square feet of Class A space vacant. This represents approximately 11 percent of Class A space or 3.5 percent of the total existing inventory. Our team is currently tracking close to 1 million square feet of active tenant requirements that are looking in or considering Mission Valley.

Of those active requirements, there are 10 that require more than 20,000 square feet of Class A space and there are only four options in the existing Class A buildings that can accommodate these tenants. Because of the limited supply, some of the tenant requirements will shift to other submarkets or settle for alternative Mission Valley Class B options.

With the limited supply and the growing demand, rental rates should continue to rise. The $3 per square foot "glass ceiling" was broken for the first time at the beginning 2006 when several of the Class A buildings raised rental rates significantly in response to the announcement of asking rents of $3.50 per square foot plus electric at Sunroad Enterprises' new project, Sunroad Centrum in Kearny Mesa.

Because of its central location and superior access, Mission Valley will continue to be a preferred location for the professional services, regional sales offices and back-office operations of national and regional corporate tenants. Furthermore, its proximity to SPAWAR will continue to draw defense industry-related companies. Given the diverse tenant base, low historical vacancy, consistent space absorption and rising rental rates, Mission Valley remain on most investors' radar screens.

Submitted by Grubb & Ellis | BRE Commercial

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