While San Diego County office leasing activity has yet to gain momentum, the central submarkets of Downtown, Mission Valley and Kearny Mesa are active in the investment arena.

Burnham Real Estate Services reports that since Jan. 1, 2002, investors have funneled $774.4 million into the acquisition of office properties in these three submarkets alone -- a figure representing 43 percent of the county's record $1.8 billion in office sales during the same period.

"These submarkets historically have always benefited from their central location and proximity to a large labor force," said Lynn LaChapelle, a senior vice president and principal with Burnham. "These factors, coupled with new residential and retail development, are positioning these markets for future growth in the office sector once the economy rebounds. Investors recognize the long-term value offered by properties in these areas and are staking their claims now."

Downtown San Diego alone accounts for $448 million in office acquisitions -- all of which have occurred in the past 10 months. Noteworthy sales include One America Plaza, which sold for $166.3 million in November 2002 ($286 per square foot); Symphony Towers, which sold for $134.3 million in March 2003 ($254 per square foot); First National Bank Center, which sold in July 2003 for $111.5 million ($203 per square foot); Koll Center, which sold for $95 million in June ($263 per square foot); 110 Plaza which sold for $55 million in March 2003 ($172 per square foot); the Bank of America building, which sold for $20.5 million in December 2002 ($106 per square foot); and the Chamber Building, which sold for $20.2 million in April 2003 ($116 per square foot).

Two more closings in downtown are expected to occur within the next 30 to 60 days: the sale of the Washington Mutual building located at 707 Broadway at an anticipated price of approximately $17 million, and the sale of 610 W. Ash for approximately $36 million.

"Low interest rates, stock market instability and positive economic indicators continue to fuel both regional and national investor's appetite for properties in San Diego," LaChapelle said. "Also, because the abundance of capital, internal rates of returns for these irreplaceable trophy assets are in the 9 to 10 percent range, and for core-plus assets are in the 10.5 to 11.5 percent range."

Burnham studies show that compared to the suburban submarkets, downtown has had historically low vacancy rates. Additionally, there has not been any noteworthy office construction in 13 years. As demand for space resumes, the company predicts downtown vacancy will drop below 10 percent -- an appealing factor for investors.

"What is interesting is that office rental rates have not increased along with investor interest," LaChapelle said. "Clearly investors are taking a long-term view with respect to the downtown submarket, or are looking for opportunities to reposition the assets and add value. Long-term, downtown is a good investment -- particularly for the well-located Class A properties and especially given the high barriers to entry.

"Also, economists are anticipating stronger job growth in San Diego in 2004, and this prompted many investors to begin underwriting anticipated rent spikes in the next 10 to 24 months," she said.

Burnham research shows that in downtown San Diego there are 67 office projects totaling 9,204,728 square feet. Of this space, 1,067,352 square feet is available, translating into vacancy of 11.6 percent.

"This rate is one point below countywide office vacancy of 12.6 percent, and well below the 20 percent vacancy rates being reported by some of the harder hit suburban office markets such as Del Mar Heights and Sorrento Mesa," LaChapelle said.

Major tenants are reaffirming their commitment to stay downtown as their leases expire. Arrowhead General Insurance Agency recently signed a $19 million lease to consolidate its two downtown offices into 67,703 square feet formerly occupied by Latham & Watkins in the Merrill Lynch building. Latham & Watkins also recommitted to downtown, moving into 70,000 square feet in One America Plaza.

Not only is downtown benefiting from strong office investment activity but projects such as the new Petco Park, recent convention center expansion, new Omni San Diego Hotel and thousands of new housing units are transforming the area into a vital 24/7 business and residential district.

Bill Shrader, a senior vice president with Burnham Retail Group, notes that in 2002 and year-to-date in 2003, downtown has seen the completion of nearly 1,000 residential units in 11 projects. Another 7,000 units are either under construction or planned to be completed by 2006.

"It doesn't stop there," he said. "Beyond 2006, another 2,500 units are planned and announcements of new developments continue. Just recently, another downtown block bounded by A and B streets and Ninth and 10th avenues, was purchased with plans calling for high-rise condominiums.

"Today, more than ever before, people want to live downtown to be closer to work and to take advantage of the variety of entertainment, retail and restaurant opportunities that are all within walking distance," he said. "More than 300,000 square feet of street-level retail is being added to the market to support this wave of residential development. In addition to a planned supermarket, much of this space is attracting neighborhood, service-oriented tenants, like dry cleaners, bank branches, hair salons, convenience markets, drug stores, video rentals, coffee shops and delis."

Given their high visibility, these retail spaces are commanding premium rents as high as $3.50-$4.00 per square foot along Fifth Avenue, although Shrader noted that average downtown retail rental rates are in the $2.50 to $3.00-per-square-foot range.

In the Mission Valley submarket, office investment activity has been keen as the vacancy rate is well below 10 percent, the supply of land for commercial development is limited and residential building is booming. Over the past 12 months, Mission Valley has recorded eight office investment sales totaling $200.4 million.

These include Pacific Center I and II, for $85.8 million ($198 per square foot) in September 2002; Valley Corporate Center, $24.2 million ($142 per square foot) in August 2002; Mission Center Office Park, $21.1 million ($108 per square foot) in October 2002; Crossroad Office Park, $18 million ($135 per square foot) in August 2002; Rio Vista, $17 million ($157 per square foot) in April 2003; Mission Corporate Center, $11.8 million ($108 per square foot) in November 2002; and Central Valley Plaza which sold twice - for $11.25 million ($128 per square foot) on June 10, 2002, and for $11.2 million on June 14, 2002 ($127 per square foot).

"In Mission Valley, much of the land that originally was entitled for commercial development has been rezoned to accommodate apartments and condominiums," Shrader said. "There has also been a wave of retail development along the northern Friars Road corridor, including Fenton Marketplace where there is a Costco, Ikea and a variety of services including a new San Diego branch library. With office vacancy at just 5.8 percent, and only the 75,000-square-foot Rio San Diego Plaza on the horizon, investors see a stable market where demand will keep pace with supply for the foreseeable future."

Shrader added that more than 11,324 apartments and condominiums have been built in Mission Valley since 1998, and another 1,174 new units are planned. Shea Homes and Continental Homes have begun marketing Escala, a 780-home master-planned community that will offer neighborhoods in varying price ranges. The project is being built on 90 acres the companies purchased from H.G. Fenton Co. in 2002.

Next to Escala, Archstone recently broke ground on a 396-unit apartment community that will be owned by H.G. Fenton Co. Both developments are being designed with the City of Villages concept in mind, and will offer quick access to mass transit and a variety of onsite services and amenities.

The San Diego Chargers' current proposal for the redevelopment of Qualcomm Stadium calls for a mix of hotels, restaurants and retail in addition to a larger sports facility. While the outcome of the team's proposal has yet to be determined by the city of San Diego, Mission Valley is clearly following downtown's lead and is well on its way to becoming a vibrant live, work and play community.

Kearny Mesa reports $126 million in office sales activity over the past 14 months. These transactions included Century Park I, $29.8 million ($146 per square foot) in April 2003; Manchester Plaza (formerly Mesa View), $29.3 million ($264 per square foot) in March 2003; 3750-3760 Convoy St., $19.7 million, ($156 per square foot) in April 2003; Interstate Office Park, $19 million ($176 per square foot) in June 2002; Fireman's Fund building, $17.9 million ($152 per square foot) in June 2002; and Genesis Plaza, $10,450,000 ($185 per square foot) in October 2003.

Kearny Mesa did see the completion of two new office buildings totaling 216,183 square feet during the first quarter of 2003. Manchester Plaza, with 110,994 square feet, and California Coast Credit Union, with 105,189 square feet, contributed to net absorption of 154,223 square feet, although vacancy in Kearny Mesa stands at 11.3 percent.

"Institutional investors in general see the fundamentals of the San Diego real estate as very strong," LaChapelle said. "Moreover, there is a limited land supply putting a natural cap on the amount of new development that can occur when the market turns around. This means that office properties are well positioned for solid returns on long-term investment."

Grove is president of The Grove Agency.

Burnham Real Estate Services: www.burnhamrealestate.co