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North County office market on road to recovery

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San Diego County's office market north of state Route 52 continues to recover from a surplus of construction during the middle of the last decade and some subareas are faring much better than others.

If there is a general consensus, it is that too much office space was built in Carlsbad. Just how much space is available depends on the survey, however. By CB Richard Ellis' accounts, Carlsbad ended the second quarter with a direct office vacancy rate of 24 percent, an overall vacancy rate of 25.1 percent, and an overall availability rate of 28.8 percent.

The CoStar Group gave Carlsbad a 22.3 percent direct vacancy rate, and Cassidy Turley/BRE Commercial arrived at a 27.4 percent direct vacancy rate in a 6.77 million-square-foot submarket for the same period. In any case, this city continues to feel the impacts of overbuilding in the 2000s.

A notable lease in Carlsbad during the second quarter was that of NTN Buzztime, Inc., an electronic trivia provider, (Amex: NTN) taking 28,458 square feet in the Carlsbad Courtyard property.

Yontoo Technology took 22,247 square feet in Carlsbad's Pacific Heights Corporate Center during the quarter as well.

Other Carlsbad leases included Thomson Reuters taking 21,679 square feet, Navteq taking 12,401 square feet and San Diego-based NRG Energy expanding by 9,899 square feet.

Oceanside's office market has fared a bit better than Carlsbad. That coastal city posted a 17.1 percent vacancy with 275,624 square feet available out of a roughly 1.62 million-square-foot market according to CoStar.

Here again, different researchers may arrive at very different vacancy figures. CB Richard Ellis, for example, pegged Oceanside's direct vacancy at 23.2 percent, its overall vacancy at 23.8 percent and its overall availability at 26.1 percent.

Further south, Del Mar Heights is a submarket that has seen some pretty extreme swings in its vacancies within the past 15 years, depending on what is going on with the economy. There even can be huge differences in how the space is being tabulated. For example, by CB Richard Ellis' accounts, while Del Mar Heights had a direct vacancy rate of 12.3 percent, the overall vacancy rate climbs to a 16 percent with sublease space and there was an overall availability rate of 23.4 percent when planned vacancies were projected as well.

Cassidy Turley BRE incidentally pegged Del Mar Heights' direct vacancy at 13.9 percent as of the end of the second quarter.

There is no single reason for the differences from one company to another. Much depends on the timing of the survey, what's included in the sample (such as eliminating buildings of less than 10,000 square feet) and whether or not leased but empty space is considered occupied.

The University Towne Centre market saw one of its largest leases ever here when Illumina (Nasdaq: ILMN) signed a $335 million 20-year lease when it occupied the Nobel Research Center at the beginning of the year. That market posted a direct vacancy of 18.5 percent by CB Richard Ellis' accounts and a direct vacancy of 18.2 percent according to Cassidy Turley.

CoStar reported the Interstate 15 Corridor had an overall vacancy of 17.8 percent as of the end of June, but that is considerably better than in the high 20 percent ranges that were experienced a year earlier. If there is a weakness in the I-15 Corridor, it is in the Scripps Ranch submarket, which continues to try and regain its footing from the loss of Nokia (NYSE: NOK) last year. That user vacated the Scripps Northridge development to occupy about 190,000 square feet in The Summit property in Rancho Bernardo. Cassidy Turley BRE Commercial pegged Scripps Ranch's direct vacancy at 37.9 percent in a 2.02 million-square-foot submarket.

Balfour Beatty's new lease at Cush Plaza in Scripps Ranch for 23,978 square feet was notable here.

Sorrento Mesa had a direct vacancy rate of 10.5 percent and an overall availability rate of 15.5 percent in the second quarter according to CBRE.

Wells Fargo Bank took 64,148 square feet on Wateridge Circle in the Sorrento Mesa area and Intercare Insurance Solutions took 21,247 square feet in Sorrento Towers North, according to CoStar. Charlotte Russe (NYSE: CHIC) also took 22,000 square feet on Pacific Center in Sorrento Mesa during the second quarter.

Other significant second quarter leases signed north of SR-52 include University of Phoenix(San Marcos for 27,265 square feet) and Welk Resort Group (San Marcos for 14,196 square feet).

Sales are picking up, but not that many high-profile office buildings have made themselves available. By Cassidy Turley BRE's accounts, three of the four top sellers north of SR-52 during the second quarter were in Sorrento Mesa.

Notable office sales during the second quarter included a Beacon Capital entity's purchase of the 265,958-square-foot Wateridge Plaza for $50.5 million, a Kilroy Realty-entity's (NYSE: KRC) purchase of the 176,983-square-foot Scripps Wateridge Plaza for $32.7 million, and CruzanMonroe's purchase of the 116,000-square-foot CentreWest Plaza for $18.4 million.

The one significant sale in the second quarter that wasn't in Sorrento Mesa was a Wasatch partnership's acquisition of a 75,200-square-foot building known as Kelly Corporate Center IV for about $12.92 million.

Cassidy Turley reports that due to the amount of new construction completed in the middle of the last decade, there are many high quality Class A office buildings to choose from. Large blocks of shell space of more than 50,000 square feet are now in limited supply, however.

“The number of transactions recently signed coupled with significant deals that are currently in the market and about to sign indicate that tenants looking for large blocks of shell space will have diminishing options throughout 2011 and 2012,” CT BRE writes.

CB Richard Ellis reported construction activity for class A, B, & C buildings remains very limited. Only a single building was cited as being delivered. That was a 3,887-square-foot Class B property at 721 N. Vulcan Avenue in Encinitas.

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