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Otay Mesa industrial vacancies still high, but properties selling

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While Otay Mesa’s industrial vacancy remains high, property sales may be picking up.

A new Cassidy Turley report stated that out of a 14.49 million-square-foot inventory, Otay Mesa had more than 3.12 million square feet available for a 21.6 percent vacancy rate at mid-year.

The Otay Mesa submarket -- which saw nine new leases signed during the second quarter grossing 436,736 square feet. But only 138,827 square feet was net absorbtion.

The CT report said by contrast, Chula Vista had 929,780 square feet available out of 5.51 million square feet for a 16.9 percent vacancy rate; National City had 250,627 square feet available out of 2.33 million for a 10.8 percent vacancy rate, and San Ysidro had 270,047 square feet out of 1.31 million square feet available for a 20.6 percent vacancy rate.

Major lease transactions on Otay Mesa during the second quarter included Imperial Toy Corp., leasing 257,972 square feet from Weingarten Realty Investors in the Siempre Viva Business Park; beauty products supplier Pacific World’s moving into 124,000 square feet in the Siempre Viva Business Park; and Plantronics Inc. (NYSE: PLT), a headset manufacturer, taking 23,368 square feet in the Ocean View Hills Corporate Center from Morgan Stanley (NYSE: MS).

While Otay Mesa managed positive absorption in the second quarter, the CT report said Chula Vista didn’t register any leasing, and National City, which had 8,900 square feet of leasing, saw 14,489 square feet go vacant.

The CT report said the vacancy rates are expected to remain relatively steady across all South County submarkets.

“A modest surge in market activity will cause vacancy to fall slightly in the third quarter as tenants and buyers occupy their new space,” the report continued.

Rental rates --which have been quoted as low as a monthly 25 cents per-square-foot in Otay Mesa in some cases -- remain favorable for companies needing to renew, expand or relocate.

“Otay is still struggling to find the bottom,” said Darren Mullins, a Cassidy Turley senior vice president who prepared the report in conjunction with his associate Erik Parker.

“A lot of landlords are competing for tenants, and there are some spaces that have been vacant for more than five years.”

Mullins said the spaces that are 100,000 square feet and larger have been particularly hard to fill, but suggested the better spaces are seeing better results.

“The 'flight to quality’ trend has proven beneficial for landlords of high quality properties that have struggled with vacancy for several months,” the report added.

However, “the building sale market in Otay Mesa is recovering at a much faster pace than the leasing market," Cassidy Turley wrote. "Owner/user building sale prices up to 60,000 square feet have increased about 20 percent over this time last year; while the lease rates have fallen about 40 percent from the top of the market in 2006 and continue to struggle to find a solid footing. “Despite a mediocre start for 2012, sales activity showed signs of positive momentum with several building sales in the South County markets.”

“Within the last six months, the supply of quality buildings has begun to decline, as buyers show more confidence in the market,” the report said, adding that low interest rates have increased buyer appetites.

The CT report said the demand for high-quality buildings is expected to continue into 2013, but as those buildings come off the market, other lower-quality properties could prove difficult to sell.

Asking prices for high-quality properties in the Otay Mesa area range from $79 to $89 per square foot; while buildings further north in Chula Vista and National City range from $106 up to $152 per square foot depending on size, age and location.

“Sale prices showed improvement from the first quarter and will continue to slowly trend upward as the supply of quality buildings decline throughout South County,” the report said.

The most recent large transfer on Otay Mesa cited by The CoStar Group (Nasdaq: CSGP) was that of a 77,760-square-foot building at 1840 Dornoch Court that was quitclaimed for $4 million from CRE LJ CA LLC, c/o One West Bank, to Alaska Copper Cos. of Seattle.

In May, a partnership of JJB Land Co., of Escondido, purchased a 115,290-square-foot building at 8851-8877 Kerns St. on Otay Mesa from an LNR Partners (NYSE: LNR) entity for $5.72 million. That property was acquired via an online auction.

Also in May, Pacific Manufacturing Inc. purchased a 17,406-square-foot building at 1520 Corporate Center Drive on the mesa for $1.23 million from the Small Business Administration.

Looking ahead Mullins said while filling more than 3 million square feet is a daunting challenge, there are numerous positives coming to the mesa or, like the opening of State Route 905 last month, are already in place.

Mullins said he is also excited about the cross-border airport terminal, Tijuana’s Rodriguez Field, to that could get under way early next year.

“The permits for that should be ready before the end of the year,” Mullins said. “We may see some ancillary businesses that will complement that.”

Mullins added another factor that will help Otay Mesa is the significant improvement in home sales at EastLake and Otay Ranch.

These sales, he said, should not only help the housing situation, but should ultimately fuel the demand for companies to occupy buildings on Otay Mesa.

"They (EastLake and Otay Ranch) are seeing multiple offers,” Mullins said. “Those markets are on fire.”

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