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Rancho Bernardo: The new frontier?

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As you drive through San Diego County, it's hard not to notice the extensive new construction underway. With high-rise buildings such as Diamond View Tower, Sunroad Spectrum, La Jolla Commons and mid-rise buildings such as Paseo Del Mar, Gateway at Torrey Hills and Centerpoint Plaza (to name a few), it is evident that we are in the thick of a development cycle.

Despite the millions of square feet under construction, as well as several more planned and proposed developments, investors don't appear worried about all this speculative construction. With San Diego’s beautiful weather and strong economy and a laundry list of tenants in the market, there is no doubt these buildings will get filled. As we examine the various submarkets and their respective construction activity, it seems one submarket stands out among the rest: Rancho Bernardo.

Rancho Bernardo is one of the fastest growing residential and commercial markets in San Diego County. Currently, there are about 1 million square feet of office projects under construction. Rancho Bernardo is rapidly transforming from an R&D corporate headquarters to a high-end office market. With land prices at an all time high, new construction rental rates are breaking the $3 mark, but are still lower than other high-end markets such as UTC and Del Mar. Furthermore, with the expansion and near completion of new arterials such as the state Route 56 and Interstate 15 corridors, it's as if Rancho Bernardo has undergone a triple bi-pass. Additionally, with some of the only available commercial land in San Diego, Rancho Bernardo will continue to grow into a thriving office market.

At this time, there are seven new projects under construction along the I-15/56 corridor. The largest project is Kilroy's (NYSE: KRC) Santa Fe Summit. This four-building project will total 466,000 square feet and has been 100 percent pre-leased by Intuit (Nasdaq: INTU).

Also available on that site is an additional build-to-suit opportunity for up to 350,000 square feet. Kilroy has been very active along the I-15, wrapping up the final two phases of Innovation Corporate Center as well as breaking ground on Phase III of Kilroy Sabre Springs. Innovation Corporate Center, Building C totals 75,000 square feet and has been 100 percent pre-leased to Accredited Home Lenders. Building H, which is 146,000 square feet, has been 100 percent pre-leased to Scripps Medical. In addition, Phase III of Kilroy Sabre Springs' 140,915 square feet, Class A office project has broken ground, with asking rents of $4.25 plus utilities.

Menlo Equities, another active developer, broke ground on Discovery Corporate Center in early 2006. This three-building project will total 241,000 square feet, and a portion of the project, 150,000 square feet (buildings 1 and 2), has been pre-leased to Broadcom (Nasdaq: BRCM). Building 3 is currently under construction and is being marketed at $2.45 triple net.

Granum Partners has begun construction on Phase I of Bernardo Terrace. Bernardo Terrace is a 330,000 square feet Class A project designed by Brian Paul and Associates. Granum has not yet disclosed the asking rate.

The seventh project under construction is Pinnacle Executive Center. Developed by Chris Coseo, this new office project will be a 108,844-square-foot, five-story Class A building with asking rates of $3.05 plus utilities.

This substantial growth is driven by a thriving a residential community and expansion of many local companies. Rancho Bernardo has a large number of new housing communities: Santa Fe Valley with 1,200 homes, 4S Ranch with 4,715 homes, Black Mountain Ranch with 942 homes, Santa Monica with 139 homes, Torrey Highlands with 2,693 homes and Pacific Highlands Ranch with 5,182 homes.

This expansive housing community accommodates a multitude of high-tech, highly capitalized companies that include: Hewlett Packard (NYSE: HPQ), Sony (NYSE: SNE), Northrop Grumman (NYSE: NOC), Cymer (Nasdaq: CYMI), BAE (OTC: BAESF) and SAIC (NYSE: SAI). An even larger number of "feeder" companies support these larger national tenants. Many of these companies are involved in defense, semiconductors, software, insurance and finance.

With an expanding housing community in Rancho Bernardo and the growth of the Inland Empire (which reaches as far south as Temecula), traffic along I-15 has become a nightmare. Typical traffic volumes on I-15 range from 170,000 to 290,000 vehicles per day, with daily commute delays ranging from 30 to 45 minutes. As a result of this traffic congestion, many companies have looked to more centralized submarkets for their chosen location.

Construction of the "managed lane" project along I-15 is underway. The managed lane will be a "super-freeway" with a movable center barrier that will allow for up to three additional lanes in the peak traffic direction. Carpools and FasTrak users will be able to enter and exit the managed lanes from the main freeway lanes at seven intermediate access points along I-15. The first segment, between state Route 56 and Rancho Bernardo, will open in late 2007, offering a better commute for employees as well as decision makers. By the end of 2008, all three segments of the I-15 corridor managed lane project will be complete.

Rancho Bernardo is quickly transforming into one of the premier office markets. With rental rates well below those of Del Mar and UTC, decreased traffic delays due to the completion of the managed lanes, connection to coastal markets with the completion of State Route 56 and premier Class A construction, Rancho Bernardo will continue to attract highly capitalized corporate users and will become a great option for those companies in need of high-end facilities at more manageable prices.

Starck, Russell and Gonor, of Grubb & Ellis|BRE Commercial, specializes in the leasing and sales of office properties throughout the I-15 corridor and central San Diego.

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