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Commercial real estate markets, improving, but long road ahead

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While a thousand uncertainties still confront the commercial real estate market, there may be reasons for hope.

The employment picture remains the big question. The Economic Development Department reports San Diego has lost 113,700 jobs since December 2007.

Without a strong recovery, it could take a long time to refill spaces vacated during the recession.

Whether the space being considered is office, industrial or retail, different brokerages and research firms disagree as to how much net absorption occurred in any given quarter. All seem to agree, however, there are plenty of empties.

In the office market, while there was plenty of gross leasing activity, much of this leasing tended to be tenants moving from one building to another. Nokia for example, which had about 200,000 square feet in the Scripps Northridge campus overlooking Scripps Ranch, went into a similarly sized space this fall at the Summit in Rancho Bernardo.

CoStar, which many of the brokerages use, pegged the Interstate 15 Corridor's Class A vacancy at 17.1 percent with 774,669 square feet available at the end of the third quarter. The Class B space was 18.5 percent in the third quarter. That translated into more than 1.2 million square feet of vacant space. If 286,000 square feet of Class C space is added to the mix, it totals about 2.25 million square feet of empty space.

Cassidy Turley BRE Commercial found that Carlsbad had a 31.4 percent availability rate out of a 4.03 million-square-foot submarket in the third quarter. Given such vacancy, it appears concessions will be common for many months, if not years to come.

Although some reports say there is as much as 1.8 million square feet of vacant office space available in downtown San Diego, CB Richard Ellis put the total at about 1.57 million. Either way, it could be several years before a new speculative office building is justified downtown.

Industrial vacancies comfortably in the single digits three years ago have crept into the low double-digit levels. While most submarkets are still relatively strong, others, such as Otay Mesa, where roughly 3.5 million square feet of space is still unspoken for, are still going begging.

The retail sector, meanwhile, faces countywide average retail vacancy of 6 percent to 8 percent -- virtually double the rate three years ago.

Hotels as an asset class fare even worse. Some, such as the W in downtown San Diego, have been given back to their lenders. Others such as the Holiday Inn on First Avenue are going through foreclosure, while others such as the Park Hyatt (former Four Seasons) Aviara are more than 90 days delinquent on their loans.

Hotel industry watchers aren't totally bleak in their assessments, however. The precipitous drop in RevPAR (revenue per available room) seems to have stabilized, and occupancies have been improving of late.

There seems to be universal agreement that apartments are the most favored asset class in San Diego County. Rents have only dipped slightly in three years here and the vacancies have been consistently at or less than 5 percent for most of the past several years.

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