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Office vacancies continue to climb

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San Diego County's office vacancy rate rose by a full percentage point from the first to the second quarter to 16.1 percent -- a figure that could easily go higher with all the new construction.

A CB Richard Ellis report states this latest vacancy hike marks the third consecutive increase since the third quarter of 2006, when the rate was 12 percent.

"The rate has been creeping up since the fourth quarter of 2005, when it was at its recent low mark of 8.9 percent," the report states.

The vacancy rate was last at 16 percent in 1995, when the economy was just beginning to emerge from that decade's recession.

While the newest buildings downtown -- Broadway 655 and DiamondView Tower -- are largely leased up, some of the older structures are having a more difficult time.

Downtown vacancy remained flat at 13.6 percent and only six of the 27 tracked submarkets recorded a vacancy rate decrease.

To the north, it is a mixed bag in Carlsbad. The good news is a 2.1 percent drop in the office vacancy from the first to the second quarter. The bad news is Carlsbad's vacancy is still 24.3 percent, according to CBRE.

Submarkets with the most gross leasing activity during the quarter include Carlsbad, with a total of nearly 177,000 square feet (84,854 net); Sorrento Mesa, with more than 155,000 square feet; downtown San Diego with roughly 135,000 square feet; and UTC with approximately 122,000 square feet.

Of the major markets, the lowest vacancy rate was in Del Mar Heights at 10.1 percent, followed by UTC at 10.8 percent. The highest rate was in Rancho Bernardo/Poway at 25.0 percent, followed by Carlsbad's 24.3 percent figure.

Among other notable transactions, global health care products company Covidien, construction consulting firm PBS&J and specialized laboratory service provider Genoptix (Nasdaq: GXDX) signed leases totaling 130,000 square feet in the Carlsbad Research Center, helping to create the first quarter-to-quarter office vacancy rate decrease in Carlsbad since the first quarter of 2006.

Carlsbad sublease space availability also decreased from 130,606 square feet in first-quarter 2008 to 112,298 square feet in second-quarter 2008.

Carlsbad's average asking lease rate decreased from $2.54 per square foot per month to $2.42.

UTC, meanwhile, is one of six submarkets with more than 100,000 square feet of office space under construction. UTC has 299,500 square feet under way -- this being in Hines' La Jolla Commons project, which was just about complete at press time.

Other major construction under way around the county includes Sudberry's Terraces @ Copley Point development, with 380,000 square feet in Kearny Mesa.

Multitenant office development throughout the county totaled 1.3 million square feet, with an additional 825,000 square feet of owner-user buildings and another 373,000 square feet of medical office properties.

Upon delivery, the new office space will require significant leasing and sales activity to offset increasing negative absorption. Nearly 200,000 square feet of San Diego County office space was put back on the market in the second quarter. This brought the year to date net absorption to minus 430,000 square feet.

This not only marked the third quarter in a row with negative growth, only two of the 27 submarkets registered net absorption levels above 20,000 square feet for the quarter. Sixteen submarkets had negative net absorption totals during the second quarter. Carlsbad's net leasing of 84,854 square feet, followed by UTC with 21,119 square feet of net office absorption, represented the two top examples on the positive side.

Additionally, gross leasing activity totaled more than 1.1 million square feet for the quarter.

Construction activity has been noticeably slower than previous years, largely due to the lack of developable land, higher land and construction costs as well as a slowing economy.

At the end of the second quarter, more than 1.3 million square feet was under construction with an additional 825,000 square feet of owner-user office and 374,000 square feet of medical office space. Central San Diego leads the way, with 1.1 million square feet -- 380,000 square feet of which is in Kearny Mesa.

The most significant projects under construction include La Jolla Commons (300,000 square feet) in UTC and the Terraces @ Copley Point (380,000 square feet) in Kearny Mesa.

The weighted average asking lease rate for office space stayed steady during the second quarter at $2.46, a slight decrease of 1 cent compared to the end of the first quarter.

Class A space had the highest average asking lease rate at $2.79, the same figure as last quarter, followed by Class B space ($2.24) and Class C space ($1.76).

Despite a stable basic economy and some improved affordability in the housing market, CBRE states the San Diego economy will struggle through 2008 and will only begin to turn around in 2009.

"There will be a healthy rebound at that time, but, longer-term, San Diego is expected to underperform the U.S. economy," the report concludes. "Outside of biotech and other tech-producing industries, many of the area's basic industries will be slow-growing over the long term."

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