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Report: Region's office vacancies on the rise

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San Diego County's office vacancy, which until recently had been consistently lower than the national average, is now slightly higher, according to a Colliers International report.

In San Diego, Central Business District (CBD) vacancies jumped from 13.20 percent to 14.90 percent, and suburban market vacancies increased from 13.13 percent to 13.81 percent from the third to the fourth quarter of last year.

Overall, the San Diego office market vacancy rate increased from 13.14 percent to 13.96 percent in the fourth quarter -- up 250 basis points from 11.46 percent measured in the fourth quarter of 2006.

The U.S. office market closed 2007 with the fourth quarter vacancy rate increasing 18 basis points to average 12.54 percent -- the first such increase since the third quarter of 2003.

Nationally, vacancies increased from 11 percent to 11.13 percent in central business district (CBD) markets.

For suburban office markets, vacancies increased from 12.99 percent to 13.19 percent during the fourth quarter.

There was a nearly even split among downtown markets with regard to vacancy.

Twenty-seven of the nation's CBDs surveyed by Colliers recorded a decrease in vacancy over the past quarter -- while 26 posted an increase in downtown vacancy.

On the suburban front, 29 markets saw vacancies increase during the fourth quarter -- while 26 experienced a decrease.

Nationally, there was good news for owners of top-quality office space. Fourth-quarter vacancy rates for top-tier (Class A) office space declined from 11.63 percent to 11.43 percent.

In contrast, with between 2 million and 3 million square feet of office space added last year, depending on the survey, San Diego County's Class A vacancy was on the upswing from 14.66 percent to 15.40 percent in the fourth quarter alone.

Nationwide, vacancy rates for Class B and C space jumped 53 basis points to 13.55 percent. San Diego saw the biggest space increase in Class B properties where vacancy escalated 112 basis points from 14.5 percent at the close of the third quarter to 15.62 percent in the fourth quarter.

With such firms as Intuit (Nasdaq: INTU), which has moved its local operations to the Santa Fe Summit Development along state Route 56, and a whole host of smaller firms vacating offices, Class B space posted about 812,625 square of negative absorption last year.

San Diego's Class C vacancy grew by 32 basis points in the fourth quarter to 8.21 percent -- a vacancy that is still quite low considering the quality of the space.

Absorption nationwide absorbed 9.7 million square feet during the fourth quarter, significantly down from the third quarter absorption of 18.3 million square feet bringing the year-to-date total absorption to 62.7 million square feet.

Absorption was also well below 2006 levels, when occupied space increased by 25.9 million square feet and 2006 full-year absorption was 95.8 million square feet.

Fourth quarter net absorption in San Diego was nearly flat, amounting to less than 25,000 square feet.

This resulted in a net demand of 196,000 square feet for 2007, significantly less than the 1.2 million square feet absorbed in 2006.

In contrast, fourth quarter net absorption was relatively brisk for Class A space, totaling 227,000 square feet.

"However, these gains were eroded by weak demand in Class B and C space that resulted in 201,000 square feet of negative net absorption," the report continued.

"There is still considerable demand for quality Class A space in San Diego," observed Chad Urie, a Colliers senior vice president and office properties specialist. "Even though the year was pretty lackluster across the entire office market, you can't discount nearly 1.2 million square feet of net demand in the Class A market."

"The world looks very different now than it did just three months ago, when we released our third quarter numbers," remarked Ross Moore, Colliers senior vice president and market and economic research director. "The economy is showing many signs of slowing and the December jobs report was well below expectations. The Fed's 75 basis point rate cut Jan. 22 will go some way to improving the economic landscape, but the sluggish business environment will not disappear overnight.

"While we had marked down our Q4 projections, this quarter's office absorption numbers were still considerably below our latest revisions. This suggests that the first half of 2008 could be marked by relatively anemic leasing conditions for many U.S. cities," Moore adds.

Nationally, another 21 million square feet was added to the office market during the fourth quarter, with another 111.6 million square feet under construction at the end of 2007.

In terms of new supply, full-year completions totaled 69.8 million square feet -- a 10.9 million square foot increase over 2006.

In San Diego, 696,000 square feet of new office space was added in the fourth quarter, bringing the year-end total to 2.2 million square feet.

"Clearly, new supply outpaced demand throughout 2007 and was a key contributor to increased vacancy," Urie said. "In fact, 30 percent of the increase in vacant inventory was new first generation space completed in 2007. New supply created 1.6 million square feet of absorption. However, this gain was minimized by 1.4 million square feet of negative absorption in pre-existing space."

Both downtown and suburban Class A rents increased compared to the previous quarter with a 2.7 percent rise in CBD rents and a 1.7 percent increase in suburban markets around the country.

CBD rents have spiked 18.5 percent year-over-year, and suburban markets have posted a year-over-year increase of 11.1 percent.

San Diego's rent increases were less extreme with CBD rents, up by 3.5 percent and suburban rents by 6.4 percent.

Class A downtown rents in the U.S. averaged $2.55 per square foot in the fourth quarter. Class A downtown and suburban asking rents in San Diego averaged $2.95 per square foot, but despite the soft economy, may be headed higher.

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