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Industrial construction down

S.D. County office vacancy highest in a decade

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Office vacancy now stands at its highest in more than a decade, more than double the 7.4 percent rate in 1998, while industrial construction is at its lowest level since 1994.

Colliers International reported countywide office vacancy has increased by six full points from a low of 8.9 in the second quarter (Q2) of 2006, to 14.9 percent as of June 30.

The second quarter was the eighth consecutive period of increased vacancy. The Colliers report says while there is at least 185,000 square feet of pre-committed office space, this is out of the 1.1 million square feet of construction slated for completion by year-end.

Net absorption totaled 46,004 square feet in the second quarter.

Of that, just over half was attributed to occupancy of new space built during the quarter.

A major exodus from Class B space occurred in 2007 -- approaching nearly 1 million square feet of negative absorption. The trend has reversed since, with a positive demand of 81,239 square feet year-to-date.

Class A office space demand continues to remain strong countywide with 310,723 square feet of net absorption year-to-date and 75,120 square feet absorbed in the second quarter.

The Class A suburban office market performed better with 157,399 square feet of net absorption, bringing year-to-date net absorption to more than 280,108 square feet.

Downtown San Diego put back 82,279 square feet of Class A space, but still managed to stay positive in that category with 30,615 square feet absorbed the first six months of the year.

Total downtown San Diego office space was a negative 28,441 square feet of net absorption and the suburban submarkets posted a positive 74,445 square feet in the second quarter.

Carlsbad (135,170 square feet) and Scripps Ranch (54,495 square feet) measured significant net absorption activity in the quarter.

Conversely, Carmel Valley (minus 100,697 square feet) and Mission Valley (minus 93,536 square feet) were putting space back.

"For the balance of 2008, vacancy should continue to increase due to continued new supply coupled with weak demand. It is likely that overall vacancy will top out at nearly 16 percent by year-end before decreasing in 2009," the report stated.

"Class A vacancy could reach 19 percent, considering the pipeline of new supply that will be added in 2008."

While new construction is slowing down, an additional 1.5 million square feet is expected to be completed by year-end.

New construction in the second period totaled 412,947 square feet with only 18 percent of this space pre-leased.

Another 555,000 square feet is planned in 2009, of which 450,000 square feet is a build-to-suit office tower for Sony in Rancho Bernardo.

An additional 14.2 million square feet is proposed for future development -- most of which could be delayed until 2009 or later.

Industrial

Currently, 1.5 million square feet of industrial space is under construction, of which 41 percent is pre-committed. This will amount to at least 867,000 square feet of additional new space absorption for the balance of 2008.

Nearly one-third of the space under construction is located in Otay Mesa.

Oceanside will add 16.4 percent and the Campus Point/Eastgate submarket of San Diego will contribute an additional 16.7 percent of the total. Just over half of the new inventory under construction is research and development space.

Planned industrial development stands at nearly 6.million square feet, with about half of this space concentrated in the North County.

With very little space pre-committed, many of these proposed projects won't break ground this year.

On the upside, the slowdown in new development will allow existing properties a chance to lease up.

Industrial vacancy remained relatively unchanged, posting a 0.1 percent increase in the second period to 8.5 percent.

This was compared to 8.3 percent a year ago. Industrial vacancy is expected to remain at less than 9 percent for the remainder of 2008.

Second quarter combined industrial/R&D net absorption was a negative 89,332 square feet in the second quarter. This kept net absorption to a positive 222,611 square feet for the first half of the year.

Countywide, second period net absorption for industrial space (manufacturing, warehouse, distribution and multi-tenant/incubator buildings) totaled 28,662 square feet and R&D (flex, wet lab and corporate headquarters buildings) totaled a negative 117,994 square feet.

The second period problems in R&D tenant demand impacted first quarter gains, but still resulted in 279,999 square feet of overall positive industrial net absorption for the first half of the year.

The submarkets reporting the strongest demand included Torrey Pines (174,937 square feet), Oceanside (162,025 square feet), South Bay (109,452 square feet), and Poway (86,253 square feet).

After two consecutive quarters of robust tenant demand, both Poway (322,852 square feet) and Torrey Pines (293,107 square feet) experienced the strongest activity countywide for the first half of 2008.

In contrast, the submarkets of San Marcos (minus 137,700 square feet), Miramar (minus 127,086 square feet), and Rancho Bernardo (minus 105,576 square feet) registered the most negative demand.

San Marcos and Miramar in particular have seen major closures as home furnishings tenants vacated warehouse showroom spaces.

On the positive side, the Colliers report noted that vacant sublease space represented less than 1 percent of the inventory with rates decreasing in most submarkets.

Approximately 2 million square feet of sublease space remains vacant throughout the county.

Double-digit direct industrial vacancy levels were prevalent in seven submarkets with Otay Mesa (18.4 percent) and Rancho Bernardo (17.1 percent) having the highest rates.

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