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Industrial building steady

County's boom in office construction may outpace absorption

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Office construction is accelerating in San Diego County and it's not certain if absorption will be able to keep up, but industrial space fundamentals appear to be strong.

Grubb & Ellis/BRE Commercial reports that more than 3 million square feet of office space was under construction as of the end of the third quarter, an increase of more than 910,000 square feet from the like quarter a year earlier.

The submarkets with the largest amount of activity included the greater Rancho Bernardo market (which contains the state Route 56 corridor) with nearly 900,000 square feet under way, Carlsbad with 450,000 square feet, and Kearny Mesa with 313,000 square feet of buildings under construction.

Major projects under construction as of the end of the third quarter include the 307,000-square-foot DiamondView Tower high-rise office in downtown San Diego; 295,000-square-foot initial phase Sunroad Centrum in Kearny Mesa; 200,000-square-foot Gateway at Torrey Hills project in Del Mar Heights; 466,000-square-foot Santa Fe Summit along state Route 56; and the 109,000-square-foot Pinnacle Executive Centre in Rancho Bernardo.

In addition, ground is being broken next month on the 340,000-square-foot, 15-story office portion of the La Jolla Commons Development in North University City.

San Diego County's office market absorbed more than 410,000 square feet of office space during the first three quarters of the year, according to the report, but there was also a lot of shifting.

The central area of San Diego County experienced 143,000 square feet of negative absorption in the third quarter as a result of two move outs. Green Point Mortgage Co. downsized from 112,000 square feet in the Scripps Ranch area to 20,000 square feet in Mission Valley.

In addition, Caltrans, which now has new larger headquarters in Old Town, not only gave up its old space across the street, but also vacated nearly 64,000 square feet in Mission Valley and 74,000 square feet in Kearny Mesa.

Kearny Mesa experienced 68,663 square feet of negative net absorption in the third quarter, and Scripps Ranch posted 144,175 square feet of negative absorption.

In the north of San Diego County, markets combined for a total of 186,897 square feet of positive net absorption in the quarter and 489,001 square feet of positive office absorption for the first three quarters of the year.

The overall Class A rental rate stood at $3.04 per square foot in the third quarter, or roughly 7.4 percent more than it was during the like period a year earlier.

Del Mar Heights had the highest asking rental rates at $3.60 (although some have quoted as high as $4 per square foot), followed by University Towne Centre at $3.30 and La Jolla at $3.25 per square foot.

While there are some downsides -- Class B space experienced negative net absorption of 93,016 square feet --, the Grubb & Ellis/BRE report indicated with continued tenant activity, single-digit vacancy rates and rising rental rates, San Diego's office market is poised to remain strong into next year and beyond.

Industrial

The G&E/BRE report said more than 1 million square feet of industrial space was completed during the third quarter, bringing the total to more than 2.2 million square feet through the first three quarters of the year.

"As a result of low interest rates, over half of the new buildings were offered for sale," the report stated. "The demand for industrial space remained consistent as net absorption eclipsed 1 million square feet for the fourth consecutive quarter."

According to the report, companies specializing in defense, software, communications and sporting goods drove the demand for industrial space.

"The countywide vacancy rate stood unchanged at 6 percent in the third quarter due to a balance of new supply and net absorption. ... The third quarter 2006 trends of strong absorption, high levels of construction and stable vacancies are expected to continue through the end of the year and into 2007," the report added.

Fueled in large part by maquiladoras across the border, Otay Mesa absorbed more than 300,000 square feet of industrial space during the third quarter. The vacancy rate for all South County submarkets was 8 percent.

The Central County's industrial vacancy rate fell 60 basis points during the third quarter to a mere 4.4 percent, marking the region's fifth-consecutive quarterly decline.

Sorrento Mesa, which absorbed 316,000 square feet in the third quarter, accounted for 850,000 square feet of absorption through September. The vacancy rate in the Sorrento Mesa market has dropped by more than 3 percentage points to 5.5 percent, according to the report.

Net absorption activity has slowed in the Interstate 15 corridor submarkets of Escondido, Rancho Bernardo and Carmel Mountain Ranch due to the construction of new buildings. Together these three submarkets experienced 190,000 square feet of negative absorption.

Along the state Route 78 corridor, Vista struggled with 160,146 square feet of negative absorption in the third quarter.

The story was very different in Oceanside, however. That submarket experienced 230,790 square feet of positive absorption in the third quarter and some 516,455 square feet to the plus side through the first three quarters of the year.

The report said warehouse distribution buildings experienced the highest absorption levels in the third quarter; research and development structures led all types of buildings year to date with more than 1.5 million square feet absorbed.

Industrial rental rates averaged 92 cents triple net in the third quarter and have remained flat throughout the year.

Research and development rental rates were down fractionally during the third quarter; at $1.17 per square foot, however, they are still among the highest in the nation.

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