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Otay Mesa stagnant in first quarter, slowly improving

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Industrial building sales on Otay Mesa were limited during the first quarter as vacancy remains a stubborn foe.

As noted in a Cassidy Turley report, building sale activity during the quarter was limited to a couple of transactions on Otay Mesa, including Airway Business Center totaling 120,136 square feet for about $9.12 million or $75.91 per square foot. The buyer was a unit of Chicago-based Heitman, LLC.

A 59,760-square-foot building at 8709 Kerns Street in Otay Mesa sold for about $4 million or $67 per square foot. Johnson Moving & Storage was the buyer.

Since the end of the quarter, Hamann Properties, which has bought, sold and developed millions of square feet of industrial space on the mesa over the years, paid $5.41 million for a 103,997-square-foot industrial building at 2350 Siempre Viva Court in Britannia Industrial Park. Cassidy Turley handled the sale.

Darren Mullins, a Cassidy Turley senior vice president, said the only major land transaction he could recall on Otay Mesa in all of last year was Hamann’s $5.06 million purchase of 16.6 acres along Otay Mesa Road. The price translates to about $7 per square foot — a fraction of the cost in Kearny Mesa or Miramar, for example.

Lease transactions were sparse this past quarter with four new transactions in Otay Mesa totaling 84,784 square feet. Of these, the largest was Virginia-based Owens and Minor leasing about 60,596 square feet at Ocean View Hills Corporate Center. Owens & Minor is a leading distributor of medical and surgical supplies.

Limited leasing activity contributed to Otay Mesa posting just 12,422 square feet of net absorption in the first quarter and a vacancy rate of 15.6 percent including sublease space. This equates to a decrease of 5.7 percent from this time last year.

“We did see a slight decrease in activity during the first quarter, but it has gotten better since,” Mullins said.

“Despite the sputtering start, the South County submarkets are again experiencing signs of resurgence as we begin the second quarter of 2013,” Mullins wrote in his report, co-written with colleague Erik Parker.

“This is evident by three factors. First, the owner/user buyers and tenants are more active in their search for space. Second, as the flight to quality continues, the supply of high quality buildings both for lease and for sale continues to decline. And third, there is an increased confidence in economic recovery among the business community.”

CT wrote that asking prices for high-quality industrial buildings in Otay Mesa are creeping into the $85-per-square-foot range and owner/user buyers will continue to set their sights on these properties, while older buildings suffering from functional obsolescence or major repairs will struggle for attention.

Mullins said there are several buildings comprising much of the estimated 2 million square feet of vacancy that are functionally obsolete.

“Many of these buildings were constructed when the standard size of a shipping container was 40 feet,” Mullins said. “Today’s containers are 53 feet long and the older buildings might not have the clear height that is necessary to accommodate them.”

Having newer buildings capable of handling the larger containers is making a difference for those who are lucky to have them. Mullins said he knows of many buildings that have languished up to five years because they are considered dinosaurs by would-be tenants.

“And companies have shown that they will pay more to get what they need,” Mullins said.

Asking rental rates are expected to remain stagnant as landlords compete for quality tenants to fill longstanding vacancies.

The industrial vacancy on the mesa stood at about 14.1 percent at the end of the quarter. Mullins said that translates to the 2 million figure, the available space amounts to more than 3 million square feet, 2½ years ago, by most accounts.

The still-high vacancy hasn’t stopped Otay Mesa pioneer R. Michael Murphy from planning the projected 3-million-square-foot Brown Field Technology Park, adjacent to his Brown Field Industrial Park.

When asked if this is a good time to be planning such a venture when there is still 2 million square feet of vacant space, Mullins said Murphy should do fine as long as he starts with build-to-suits until the market improves.

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