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Construction slowdown positions North County markets for rebound when market stabilizes

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According to a just-released Cushman & Wakefield report, during the first half of 2008, North San Diego County saw office and industrial construction activity decrease by more than 50 percent from the same period in 2007.

According to the report, for the first half of 2008, North County office and industrial/R&D space under construction totals a combined 590,600 square feet. This compares to the first half of 2007, when more than 1.33 million square feet of office and industrial space were under construction in North County submarkets.

Matt Strockis, senior director with Cushman & Wakefield's Carlsbad office, noted the influx in inventory that occurred between 2005 and 2007 resulted in higher vacancies, which continue today as many companies postpone expansions.

"Developers with projects in the planning pipeline are postponing construction starts and this is allowing time for some of the existing space to absorb," he said.

The Cushman & Wakefield report shows the North County office market reported positive year-to-date net absorption of 116,757 square feet, down slightly from 175,800 square feet during the same period in 2007. Direct office vacancy on total inventory stands at 16.2 percent, up from 13.1 percent the prior year.

The majority of 2008 tenant activity is occurring in the Carlsbad office market, which reports year-to-date net absorption of 119,416 square feet. Negative activity in Vista and San Marcos offset some of this momentum.

"We are seeing increased demand for corporate headquarters space in the range of 20,000 square feet and above," said John Hoffmann, a director with Cushman & Wakefield. "Many companies are beginning to see a window of opportunity to position themselves for future growth. With softer North County building purchase prices and rents, along with a greater supply of available space, the area's already strong popularity is only enhanced."

"North County has ample multitenant space but a limited supply of larger space options, and businesses realize that right now is the time to lock in quality space when rates are flat and concessions becoming more common," Hoffmann said.

Overall direct weighted asking rental rates for office product in North County is $2.53 per square foot.

"Landlords continue to offer incentives such as higher tenant improvement allowances and free rent," Hoffmann said. "We can expect to see this trend continue for the near-term."

Recent sizable leases include Genoptix (Nasdaq: GXDX), which signed a lease renewal and expansion that more than doubled its existing 45,000-square-foot space to total 108,000 square feet. Additionally, Transworld Media signed a 30,700-square-foot lease in Cruzan | Monroe's 2052 Corte del Nogal project in Carlsbad. Cruzan | Monroe recently repositioned the asset. Transworld Media will relocate its headquarters from Oceanside to Carlsbad in January.

Additionally, as North County continues to grow, the need for health care services is on the rise. H.G. Fenton Co. recently completed the Scripps Health Carlsbad Medical Center, which will provide 40,000 square feet of medical office and exam rooms, plus radiology. The facility is scheduled to open to the community in October.

Construction recently completed on Global Building and CityMark Development's Premier Crossing, a medical and professional office park in Vista. Also in Vista, CreekView, a medical and office park development by Murray | Skeetz, is under way and scheduled to be ready for occupancy in January.

Other North County health-related facilities will include a new 300-room Palomar Pomerado Healthcare hospital, and Tri-Cities 84,000-square-foot Wellness Center in Carlsbad.

The North County industrial market reports a low 8.4 percent direct vacancy consistent with the 8.3 percent in for the first half of 2007. Year-to-date net absorption is a positive 53,845 square feet. This compares to the negative 141,038 square feet of net absorption during the first half of 2007.

"The diversified nature of the San Diego economy is allowing for steady industrial demand, particularity for R&D product type," Strockis said. "The medical device, defense and telecommunication industries are doing well, and North County is well-positioned to continue to meet the needs of these types of companies.

According to Strockis, major recent expansions by SAIC (NYSE: SAI), Alphatec Spine, BAE Systems and L-3 Communications (NYSE: LLL) provide evidence of an underlying strength in the fundamentals of the local economy.

Additional recent leases include Sierra Wireless, which signed a six-year lease for 63,477 square feet of space at 2200 Faraday Ave. in Carlsbad; and global health care products leader Covidien, which signed a seven-year lease for 65,764 square feet of space at 2101 Faraday Ave.

The Cushman & Wakefield report shows the overall average direct asking industrial rental rates (all product types) have actually risen to $1.10 NNN from $1.00 NNN during the same period a year ago.

"Industrial concessions have not been significant for manufacturing and warehouse space because the demand is still there," Strockis said. "On the other hand, we're seeing some concessions for R&D product as we move through some larger space vacancies."

Major R&D projects completed this year include St. Croix Capital's Spectrum Flex at Bressi Ranch, and the 168,000-square-foot first phase of Towers at Bressi Ranch, a multitenant flex project. Both were completed in spring.

Grove is president of the Grove Agency.

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