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2013 forecast: Leasing rates

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While rents for office, industrial and retail properties are improving in some San Diego submarkets, they have a long way to go before returning to 2007 levels.

Scot Ginsburg, a Hughes Marino senior vice president, said he has seen Class A office rental rates climb by nearly 30 percent in Del Mar Heights during the past 18 months, and nearly 20 percent in the University Towne Centre submarket.

“The office rental rates that had been $2.50 to $2.60 (per-square-foot) are now $3.35 in Del Mar Heights, and rates that were $2.25 in UTC are now $2.65 to $2.75,” Ginsburg said.

The Irvine Co., which owns the 800,000-square-foot Plaza at La Jolla Village among many other properties here, led the way in pushing the Class A rents at UTC as Kilroy Realty, which owns more than 1 million square feet in Del Mar Heights, is setting the rents in that market.

In Sorrento Mesa, which, like Del Mar Heights and UTC, has fluctuated between too much and very little space over the years, the average rental rate has climbed from $2.35 to $3.00 in 18 months, Ginsburg said.

Ginsburg said that even in Carlsbad, which had been considered to be overbuilt for several years, office absorption has sufficiently improved for the rents to have climbed from $2.15 to about $2.50 during the past 18 months as well.

Ginsburg may have seen significant office rent movement in some suburban markets, but Kraig Kristofferson, a CBRE senior vice president, said rents in downtown San Diego, which still has as much as 2 million square feet of vacant space, have generally been stagnant.

“Rents have been flat in downtown while they have been increasing in the suburbs,” Kristofferson said. “Companies are moving around, but we really need some net absorption.”

Kristofferson said an exception to this rule is DiamondView Tower (where he has his offices) where the rent is in the $3 range. The problem there is with about 98 percent occupancy, there simply isn’t much space available in that property that overlooks Petco Park.

The average office rents in the fourth quarter 2012 ranged from $1.83 per-square-foot in the South Bay to $3.62 in what is referred to as the North Central County, according to The CoStar Group
As is the case in office properties, the rental rate ranges for industrial properties vary widely depending on location and the condition of the asset.

Darren Mullins, a Cassidy Turley senior vice president, said industrial lease rates on Otay Mesa, which took a precipitous drop during the recession, are still flat at best.

“The rates went from about 52 cents in 2007 to 32 cents now on 40,000-square-foot or larger spaces,” Mullins said.
By most accounts Otay Mesa still has at least 2.2 million square feet of vacant industrial space.

“It’s going to take at least a couple of years to lease all the space,” Mullins said, meaning that the rental rates there won’t be going up anytime soon.

Countywide, the industrial rental rates ranged from an average of 56 cents in the South Bay to about $1.09 for flex space in the North County according to CoStar. Although the South Bay figure seems high, it does include Chula Vista and National City as well as Otay Mesa.

The average rate for pure industrial space countywide was 81 cents per-square-foot according to CoStar.

Cassidy Turley reports that the countywide retail monthly asking rent for all product types has remained stable between 79 and 81 cents per square foot for the last couple of years. It is a rate that is about 17 percent lower than the pre-recession rate as recorded in 2007.

San Diego County’s retail market took a hit like other markets around the country, but it also has rebounded quicker than most of them.

“We’re still not at pre-recession vacancies, but we are one of the top five retail markets in the country,” said Reg Kobzi, a CBRE senior vice president.

Kobzi said the average retail rent has edged up slightly to $1.77-per-square-foot during the past couple of years, but that it is still a far cry from the pre-recession highs of $2.35 to $2.45.

“It’s only expected to go up 0.8 percent in 2013,” Kobzi said.
Kobzi was quick to point out that the highest quality centers already have rents that more or less mirror 2007 levels.
Kobzi noted that the newly expanding Flower Hill Promenade is already garnering rents that exceed $4. Bill Thaxton, a Flocke & Avoyer senior vice president, is seeing the same phenomenon.

“And you are seeing rents from $4 to $4.50 in Del Mar Highlands,” Thaxton said. “Given that the rate is between $1.50 to $2.25 for a well-located, unanchored strip center, that’s an enormous range.”
By CoStar’s accounts, the average retail rents at year-end December ranged from about $1.40 in the East County to about 2.22-per-square-foot in the North County. However, some upscale centers have much higher levels.

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