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At mid-2007, Kearny Mesa industrial vacancies the lowest in 15 years

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"Kearny Mesa's mid-year 2007 vacancy rates are at their lowest level in the 15 years we have been issuing this report and are also the lowest of San Diego's major industrial submarkets...," according to a CB Richard Ellis report.

"At these historically low levels, tenants' available space alternatives are extremely limited."

The overall vacancy rate for Kearny Mesa fell to a mere 2.3 percent with a corresponding availability rate of only 5.2 percent in the second quarter of the year, according to the CBRE report.

The submarket had posted a 2.9 percent vacancy rate, with an availability rate of 5.4 percent mid-year 2006.

The corporate headquarters/R&D segment, with a base of approximately 8.27 million square feet had a vacancy rate of 2.6 percent and a corresponding 6.4 percent availability rate mid-year 2007.

The HQ/R&D market also had a vacancy rate of 2.9 percent as of the first half of 2006.

Kearny Mesa's other product types also have very low vacancy levels, ranging from none at all in the 2.9 million-square-foot distribution/warehouse segment to 4.1 percent in the multi-tenant industrial segment this past June.

The report suggested while strong corporate user demand, a stable existing tenant base and a lack of large, high quality available spaces, have made Kearny Mesa San Diego's most logical marketplace for high-end development and redevelopment, it leaves little room for pure industrial users.

With current values easily exceeding $35 per square foot, land for business park development, particularly undeveloped land, is quite limited and expensive in Kearny Mesa.

"With such a high figure, the economic feasibility of building speculative industrial product, or even high-end corporate headquarters space, is difficult to justify," CBRE noted.

"Office development is now the best use of vacant business park land and potential

redevelopment sites," the brokerage firm added.

Kearny Mesa's industrial submarket -- the region's largest at more than 18.61 million square feet -- continues to be a very attractive choice for tenants, investors and developers, if they can find the opportunities

"Fueling Kearny Mesa's outstanding fundamentals and real estate performance are superior market dynamics, which are very important to both real estate users and investors," the report said.

"Kearny Mesa's centrality, freeway access, numerous points of ingress and egress, lack of congestion, surrounding strong and diverse labor pool, and host of retail conveniences are the cornerstones of its popularity and success," CBRE continued.

"Users of business park properties understand the bottom line value of these amenities to their customers, in attracting and retaining quality employees, and logistically with their operations.

Investors realize that these attributes allow Kearny Mesa to compete advantageously with other business park locations.

"Investors also appreciate Kearny Mesa's diversification of uses, which make this marketplace less dependent on specific technology sectors and therefore more stable," the CBRE report concluded.

Kearny Mesa experienced positive net absorption of approximately 124,000 square feet during the first half of 2007, down slightly from 144,000 square feet during the first half of 2006.

The corresponding gross industrial absorption was approximately 688,000 square feet in the first six months.

While the gross absorption has been spread out quite evenly among the various segments, major lease transactions by AIS Inc. (80,000 square feet), the County of San Diego (57,000 square feet) and SDG&E/Automated Metering Infrastructure (51,000 square feet), played major roles.

"These figures are remarkable considering how little available space exists in the market. Clearly this is why Kearny Mesa is experiencing, and is so ripe for, the development and redevelopment of high-end corporate headquarters and office product," CBRE continued.

Approximately 80 percent of Kearny Mesa's mid-year industrial absorption came in the form of leasing activity, with the remainder of the marketplace's gross absorption in the form of building sales to users.

The average price of building sales to users moved up to $235 per square foot in mid-2007, up from $209 a year earlier.

The per square foot price for buildings sold to investors in June averaged $219, up from $197 per square foot a year earlier.

Kearny Mesa's strong underlying fundamentals continue to make it the most stable environment in San Diego County for industrial real estate investors, the report stated.

CBRE said slight rental rate increases and leveling off of building values should be expected in 2008.

With very few new, second generation large vacancies projected in the near term, and very little high-end industrial speculative buildings being developed, CBRE concludes tenant alternatives on Kearny Mesa will continue to be very limited.

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