• News
  • Real Estate

Office/industrial projects stall; brokers hope for better leasing

Related Special Reports

The story of the central county appears to be as much a story about what isn't happening as what is.

Neither office nor industrial space can be filled if companies are shrinking. The county's unemployment rate was 10.1 percent in June, up from a revised 9.6 percent in May and 5.9 percent during the like period time last year.

Non-farm employment was down 52,200 jobs compared to May 2008, a decrease of 4 percent year over year.

In downtown San Diego, The Irvine Co. has placed its planned 700,000-square-foot office tower for West Broadway on indefinite hold, hotels at Lane Field can't go up until the market improves and there is no certainty as to what the Ballpark Village plan will look like if and when it's developed.

Downtown has roughly 5 million square feet of industrial space that is both decades old and largely occupied. The industrial availability rate in that submarket is just 4 percent.

What downtown San Diego still has too much of is office space. Although the submarket did manage to absorb a modest 18,778 square feet during the first half of the year, according to CB Richard Ellis, the availability rate is 19.8 percent. What's more, the tenants going in generally receive sharply reduced rents and much higher tenant improvement allowances. Such measures are needed, as the availability translates to about 1.87 million square feet of space.

Along the Interstate 15 Corridor, millions of square feet of old industrial property was in the process of being transformed into attractive Class A office space when the recession hit. Much stands empty.

CBRE reports that the direct office vacancy in the Rancho Bernardo/Poway submarket was 32.5 percent, and the overall availability rate was at 38 percent as of the end of June. Only the South Bay had a worse rate, with a mind-numbing 42 percent availability, CBRE stated.

Meanwhile, the old industrial space in places ranging from Rancho Bernardo to Kearny Mesa is rapidly becoming obsolete as manufacturing disappears from the local economy.

The Rancho Bernardo industrial market had a 14.2 percent industrial vacancy and a 21 percent industrial availability as of the end of June, according to CBRE.

Rancho Bernardo returned some 272,560 square feet of industrial space to the market in the second quarter, Miramar kicked back 174,251 square feet and Poway experienced 157,234 square feet of negative industrial absorption in the second quarter. A bit to the north in Escondido, a total of 168,854 square feet of industrial space was returned in the second quarter.

Kearny Mesa's industrial market has fared better, despite having a nearly 18 million-square-foot industrial base. That submarket had a 4.5 percent industrial vacancy rate and a 7.3 percent availability rate despite aging space.

Kearny Mesa's office market, which includes the Sunroad Centrum building, had a 17 percent direct vacancy and a 22.4 availability rate at the end of June. A net total of 55,547 square feet was given back to the submarket in the second quarter. The good news for Sunroad is that Bridgepoint Education has filled its 250,000-square-foot building.

Torrey Pines, which isn't normally thought of as an industrial market, actually has more than 5.6 million square feet of such space. Filling the space hasn't always been easy. Torrey Pines had a 9 percent direct vacancy and a 16 percent overall availability rate as the second quarter drew to a close.

Torrey Pines' office market has been defying the odds despite the economy, demonstrating the continuing lure of the University of California, San Diego. CBRE reported the direct office vacancy on the Torrey Pines mesa was a mere 0.9 percent at the end of June.

The state Route 56 Corridor, where Intuit (Nasdaq: INTU) takes up more than half of a 937,000-square-foot submarket, the direct vacancy was just 1.9 percent. The availability rate stood at 4.1 percent on June 30, but this is still a very strong statistic.

At the other end of SR 56 in Del Mar Heights is a submarket that has come full circle, and not in a positive way.

Around the turn of the decade, Peregrine Systems and a handful of other high-technology firms occupied more than 500,000 square feet in Kilroy Realty's (NYSE: KRC) Carmel Corporate Center. After the dot-com crash at the beginning of this decade the space was vacated, leaving the market with a vacancy of 30 percent or more.

Within two years of the dot-com bust and Peregrine's departure, the space was refilled with law firms, accounting firms and others. Not only that, but because of the buildings' strategic location near the junction of Interstate 5, the buildings were among the first in the area to charge lease rates of more than $4-per-square-foot.

Now with the recession and still relatively high lease rates, the spaces have been emptying once more. Del Mar Heights posted a 20.3 percent direct vacancy rate and a 28.4 percent availability rate as of the end of the second quarter. While the submarket managed a very modest 9,200 square feet of positive absorption in the second quarter, the leasing was off by about 65,000 square feet for the first half of the year and had a significant amount of negative absorption prior to the start of 2009.

User Response
0 UserComments