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Steady recovery for office, industrial markets nationally and in SD

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San Diego County's office and industrial markets are expected to mirror what is happening nationally, with a slow but steady recovery in 2012, according to a pair of real estate broker reports.

The Grubb & Ellis (NYSE: GBE) report ranked San Diego County fifth in terms of office investment opportunity behind San Francisco; Seattle; Austin, Texas; and San Jose, with Orange County rounding out the top six.

Grubb & Ellis' investment rankings were determined by a wide range of variables, such as how much vacancy existed in each market, and the strength of its technology or biotech clusters.

Notable office property sales in San Diego County in December included the 356,504-square-foot Seaview Corporate Center on Telesis Court in Sorrento Mesa, for $109 million to John Hancock Life Insurance; the $34 million sale of Valley Corporate Center at 591 Camino de la Reina in Mission Valley to a Peregrine Realty Partners entity of Los Angeles; and the $15.8 million sale of the Palomar Oaks Technology Park on Palomar Oaks Way in Carlsbad, to an entity controlled by the Bixby Land Co. of Irvine.

Buildings may be selling, but the office rental market remains problematic.

San Diego continues to struggle with high vacancies in certain submarkets such as downtown San Diego and Carlsbad -- which still have a combined 3.5 million square feet of office vacancy according to most reports.

"The office market recovery accelerated in 2011, but not to the speed of prior expansions in the sector," Grubb & Ellis wrote.

A Cassidy Turley report added net absorption for U.S. office space was 11.7 million square feet in the year's fourth quarter.

Although this figure was down from 16.1 million square feet in the third quarter, the nation absorbed 50.4 million square feet for 2011 -- compared to 18.7 million square feet in 2010.

Jolanta Campion, a Cassidy Turley BRE Commercial research director, said San Diego County posted an overall 18.7 percent office vacancy and absorbed 425,274 square feet in the fourth quarter.

The county absorbed 687,150 square feet for all of 2011.

Campion said while an improvement from 2010 -- when 164,173 square feet of office space was leased during the fourth quarter and 606,808 square feet of net absorption was recorded for that year -- "Class A is pretty much the only office space that's leasing right now."

Campion's assessment doesn't only hold here.

"The 'flight to quality' remains common in virtually every market across the U.S., and next year's continued recovery is highly dependent upon progress in resolving the financial turmoil in Europe," Grubb & Ellis wrote.

As for the industrial market, both Cassidy Turley and Grubb & Ellis report this region compared well to the national figures, which themselves showed a significant improvement.

Grubb & Ellis for example concluded that Southern California had the strongest industrial markets, followed by the Texas/Great Plains and Northern California/Pacific Northwest regions.

Nationally, demand for industrial real estate accelerated significantly last year with a total of 110 million square feet of total net absorption. This was up from just 34 million in 2010, according to Grubb & Ellis.

If Cassidy Turley's assessment is any indication, San Diego's industrial market, while still soft in some submarkets, has nevertheless seen the vacancy brought back down into the single digits.

"The (direct) industrial vacancy is finally below 10 percent. It ended 2011 at 9.8 percent," said Campion, adding that sublease space nevertheless pushes the rate up to 11.2 percent.

Not every kind of industrial space is leasing well. Campion said of the 695,964 square feet of industrial space absorbed in the fourth quarter, 480,000 square feet was for R&D space.

As a result of some negative absorption earlier in the year, Campion said a total of just 694,877 square feet of industrial space was absorbed in 2011. That was compared to 966,000 in 2010.

"We think the figure will be about 1.2 million (square feet) in 2012," Campion said.

Some submarkets are faring better than others. By all accounts Otay Mesa still has about 3 million square feet of vacant industrial space.

"When you start drilling down into some of the submarkets, things may look a bit different than the county as a whole," Campion said.

Grubb & Ellis meanwhile, didn't rank San Diego in the top 10 in terms of industrial property investment opportunities.

Los Angeles, with the nation's largest port complex, took the top spot.

The Inland Empire came in second; while this may be a surprise to many since it was very hard hit during the recession, it has experienced a significant rebound since.

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