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Office, industrial activity improving, but major construction likely years away

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While office and industrial markets continue to strengthen here, it appears it will be a long time before significant new construction may be justified.

Office

A Jones Lang LaSalle report says with companies finally beginning to hire again -- about 9,100 jobs were added in the county last month -- the office leasing picture has improved as well.

JLL cited a recent survey of business owners in which 47 percent said they expected to increase their payrolls in the coming quarters. That generally means an increased demand for office space.

Illumina (Nasdaq: ILMN) has announced that it has signed a $335 million, 20-year lease to occupy the just vacated Biogen Idec (Nasdaq: BIIB) space in 350,000 square feet in the Nobel Research Center campus in the University Towne Centre area.

Government accounts for much of the leasing demand. The County of San Diego's Operation's Division has moved into two new buildings totaling 300,000 square feet in Kearny Mesa, and The Family Resources Center renewed for 53,000 square feet in Mission Valley.

Bridgepoint Education (NYSE: BPI) continued its expansion drive by committing to occupy the yet-to-be-constructed 193,000-square-foot Sunroad Centrum II office building adjacent to the Sunroad Centrum I building Bridgepoint fills today.

Other tenants moving around include defense contractor Northrop Grumman (NYSE: NOC), which signed a lease for 93,000 square feet at The Point in Rancho Bernardo. Conversely, Northrop plans to transfer about 100,000 square feet of space when it relocates its AMSEC division from Rancho Bernardo to Kearny Mesa in the near future.

Tenants looking to add more space in the San Diego market include LPL Financial; the FBI, which has just signed a lease for 288,882 square feet in Vista Sorrento Parkway in Sorrento Mesa; Sony Online Entertainment, which needs about 100,000 square feet; Encore Capital, which needs about 30,000 square feet; and general contractor Barnhart Balfour Beatty, which needs 30,000 square feet.

Large transactions have been few and far between because most office building owners want to hold onto their assets until prices return to normal if they can. This past fall, Kilroy Realty (NYSE: KRC) paid $30.9 million ($294 per square foot) for the 105,000-square-foot 2305 Historic Decatur Building at Liberty Station in Point Loma. The building was 95.4 percent leased at the time of the sale, according to JLL.

After trading hands five times in as many years, the former 64,581-square-foot Chicago Title Building at 925 B St. in downtown San Diego was sold for $7.2 million to a Coronado-based partnership last fall.

Several large properties are on the market including one -- Emerald Plaza -- that appears to be on the verge of being sold. Divco West Properties of San Francisco is reportedly paying $99.73 million for the office portion of the mixed-use tower.

Texas-based Hines is also trying to sell its 447,000-square-foot (Golden Eagle Plaza) building at 525 B St.

With millions of square feet of office space yet to fill from Carlsbad to the South Bay, it is hardly surprising that there is no rush to put up more buildings. The JLL report said only one small speculative office project was completed in the last quarter of the year. Harbor Point is a 15,000-square-foot office building with ground floor retail in Point Loma.

A survey by Voit Commercial Services found that the county has managed four consecutive quarters of positive net absorption, with 372,943 square feet absorbed in the fourth quarter alone and more than 1.24 million square feet of net office absorption for the year.

"The fact that net positive absorption doubled from 2009 to 2010 says a lot about the trend of the market," said Chris Wood, managing director of Voit's San Diego offices. "Although demand is still somewhat weak by historical standards, 2010 marked the beginning of a renewed interest in sales transactions. The San Diego office market has continued to display more signs of stabilization and is on its way to recovery."

Vacancy also decreased, coming in at 15.42 percent for the fourth quarter, a decrease from the previous quarter's rate of 15.78 percent and 2009's fourth-quarter rate of 16.08 percent. "Throughout the last year, the vacancy rate continued to decrease at a steady rate," explained Wood. "With little new construction in the pipeline to put upward pressure on vacancies, the market should continue to stabilize."

Office leasing activity for the San Diego market totaled 7.4 million square feet for 2010, an 18.92 percent increase from 2009's total of 6 million square feet. Sales activity showed a major year-over-year increase, with 2.6 million square feet of activity in 2010 compared to the 1 million square feet sold in 2009.

The average asking full-service gross (FSG) lease rate per month, per square foot in San Diego was $2.16, one cent higher than the previous quarter's rate. The highest rates in the county were in the North City submarket, where they averaged $2.42 FSG.

"As we begin 2011, we foresee an increase in investment activity as lenders continue to dispose of distressed assets, as well as an increase in leasing activity as many short-term deals come up for renewal," Wood explained. "If job creation continues, consumer confidence will stabilize and the market will regain equilibrium."

Industrial

The countywide industrial market also saw significant improvement in the fourth quarter of 2010. CoStar reported that while the county's industrial market vacancy was still in double digits at 10.6 percent as last year drew to a close, the county absorbed more than 1.01 million square feet of space in the fourth quarter alone. Industrial rental rates continued to decline, ending 2010 at $9.75 per square foot.

CoStar said tenants moving out of large blocks of space in 2010 include Calmark moving out of 115,200 square feet at Parkway Centre One in Poway; Scripps Mesa Storage moving out of 110,902 square feet in the Rancho San Diego Industrial Center; and Unisource, which vacated 101,496 square feet on Top Gun Street in the Miramar area.

Significant move-ins included Mor Furniture For Less Inc., taking 199,359 square feet at 7757 Saint Andrews Ave; ATK moving into 114,000 square feet at Miramar Commerce Park; and BikeBandit.com filling 107,000 square feet at 7625 Panasonic Way.

The largest lease signings occurring in 2010 included: the 176,000-square-foot lease signed by Isis Pharmaceuticals Inc. (Nasdaq: ISIS) at 2855 Gazelle Court in the SR-78 Corridor market, and the 106,412-square-foot lease signed by Covan World-Wide Moving Inc. at 10015 Waples Court in the North San Diego market.

Some markets are faring better than others. While a Cassidy Turley BRE Commercial report said Otay Mesa managed to absorb nearly 230,000 square feet of industrial space in the fourth quarter, the submarket still has a 22 percent overall vacancy rate with more than 3 million square feet of vacant space.

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