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Roundtable discussion

Landlords have upper hand in SD, say tenant brokers

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The world of tenant representation, how it is evolving and the conditions of the commercial real estate markets, were topics of a recent roundtable discussion held at The Daily Transcript.

Tom Van Betten, a Cassidy Turley vice president, estimated there are now more than 100 tenant representation brokers working in the county.

“The figure has grown from 60 during the past three or four years,” Van Betten said.

For a while during the downturn, tenants and tenant brokers were considered to be in the catbird seat. The tenants seemed to have an inexhaustible number of options. What’s more, they could lease Class A office or industrial space for what they may have paid for Class B space before. That dynamic led to a mass exodus or “flight to quality” that emptied many of the Class B buildings.

Now, with Class A options much more limited — particularly in San Diego suburban submarkets — the participants said the Class A space prices are going up again, and many Class B tenants are being forced to stay put.

“The flight to quality is done,” said Ron Miller, a Colliers International senior director.

Miller; Simon Terry-Lloyd, Irving Group, vice president; and James Pieri Jr., Gateway Financial Real Estate president and CEO; said this isn’t necessarily all bad from a tenant’s standpoint.

“Class B buildings often have almost everything that a Class A does,” Miller said.

“Class B buildings are nice enough unless recruiting is an issue,” added Terry-Lloyd.

Pieri said landlords are also putting substantial monies into their Class B buildings to hold onto their tenants.

“Class B buildings are improving all the time,” Pieri said.

That said, Van Betten says while it is possible to obtain Class B space for less than $1-per-square-foot, he has plenty of tenants who don’t want settle.

“They want to do what they can to retain their key employees,” he added. “They also often want to expand their geography, which is good news to submarkets such as Scripps Ranch and Carmel Mountain Ranch.”

Qualcomm (Nasdaq: QCOM), which already has its 900,000-square-foot headquarters building in Sorrento Mesa, has continued to gobble up a lot of Class B space in the neighborhood amid speculation that it will augment the size of its already big campus. When that happens, hundreds of thousands of square feet will be deposited back on the market.

Qualcomm won’t be alone. LPL Financial will be vacating plus or minus 350,000 square feet of space at multiple locations when it goes into its new 415,000-square-foot office building, known as La Jolla Commons II, when it comes online in the University Towne Centre area in the second quarter of 2014.

Lockheed Martin is also vacating about 150,000 square feet in the area in 2014 that will need to be re-filled as well.

As contingency plans are drawn up to re-fill old space, plans are in the works for new. While pure speculative construction with zero preleasing may no longer be possible, Van Betten said projects, such as the next phase of Kilroy Realty’s (NYSE: KRC) Sorrento Gateway in Sorrento Mesa may come out of the ground once the buildings are 50 percent pre-leased.

Sorrento Gateway, which calls for about 547,428 square feet at buildout, according to CoStar, has two buildings left to be constructed. One for 82,063 and another for 50,000 square feet that could get under way within a year.

Over the long term, Kilroy is processing a plan that has been alternately known as “Paseo” and “Main Street” at the junction of Del Mar Heights Road and El Camino Real in the Carmel Valley area. That plan, which has courted controversy because of the potential traffic it would generate, calls for 500,000 square feet of office space along with retail, housing and hotel components.

Some other projects are expected long before that.

“The Irvine Co. is polishing off Bridge Point,” Miller said.

“And they (like Kilroy) don’t need any financing.” added Don Ankeny, Westcore Properties president and CEO. finishing the sentence.

The last phase of Bridge Point calls for a 75,000-square-foot Class A office building. The complex will have 591,000 square feet at buildout according to CoStar.

When asked who will be the tenants to fill these new buildings, Van Betten said he is seeing a lot of medical companies and tech-oriented startups — some of which may be headed to Downtown San Diego rather than the suburban submarkets that have been more traditional for those uses.

Van Betten added that landlords should be pleased that many of these new firms will be satisfied with second generation improvements.

“But there is obsolete space in all classes,” Miller said.

Miller said there are other variables that tenant and landlord brokers need to know about the spaces being marketed. For example, there was a built out space that was intended for Latham & Watkins in The Irvine Co.’s One America Plaza property that the law firm never occupied.

“We struck a deal with another law firm that had to have ocean views for a rental rate that’s equivalent to a Class B in a Class A building,” Miller said.

Ankeny said rental rates have bottomed out — while parking rates in sowntown San Diego in particular, have continued to escalate.

Terry-Lloyd said whether it is a matter of cost or availability, “parking is always going to be a big issue downtown.”

Roundtable Participants

Don Ankeny, President & CEO, Westcore Properties

Ron Miller, Senior Vice President & Senior Director, Tenant Advisory Services, Colliers International

James Pieri, Jr., President & CEO, Gateway Financial Real Estate

Simon Terry-Lloyd, Vice President, The Irving Group

Tom van Betten, Vice President, Cassidy Turley

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