As the San Diego County commercial real estate markets begin to regain their balance, the North County area stands ready to benefit with demand for industrial and office space already on the upswing.

"The future industrial and office supply in San Diego County will continue to be limited due to the lack of employment lands for future development, particularly in the mid-county submarkets," said Tucker Hohenstein, vice president with Burnham Real Estate Services. "As demand gains momentum, most of the county's new construction will occur in the northern and southern parts of the county where there is more land availability."

In its mid-year market update, Burnham Real Estate Services reports that the San Diego County industrial market could potentially reach last year's total net absorption of 2.6 million square feet -- a sign that the commercial real estate markets may be stabilizing.

"The industrial market is always the first to shut down during a softer economy and the first to rebound during a recovery," Hohenstein said. "If the cycle proceeds as we expect it to, the region could net 2 million square feet of industrial activity for the year, and office sector should follow with similar improvement in early 2004."

The Burnham report shows that during the first quarter of the year, the Highway 78 Corridor, North County West and Otay Mesa were the only San Diego County industrial markets reporting positive net absorption. By the end of the second quarter, virtually every San Diego County submarket followed suit, with 1.4 million square feet of net absorption for the quarter and 1.2 million square feet of year-to-date activity.

Additionally, the report shows that North County already leads the San Diego region in new industrial construction, accounting for more than 1.2 million square feet of the 1.77 million square feet under way countywide.

"All of North County's building activity is concentrated along the Highway 78 Corridor, and particularly in Oceanside where Idec Pharmaceuticals recently broke ground on a 419,000-square-foot headquarters campus," Hohenstein said. "There are 1,420 gross acres of land immediately available for development in North County representing approximately 30 percent of the county's total immediately available supply."

North County industrial vacancy stands at 9.2 percent along the Highway 78 Corridor (Vista, San Marcos and Oceanside), and 13.2 percent in Carlsbad. "This is a marked improvement in Carlsbad, where in 1999 excess supply pushed the area's vacancy to 28.5 percent," Hohenstein said. "Since then, average annual absorption of 400,000 square feet has helped bring the area's vacancy rate much closer to the countywide average of 8.4 percent.

"Carlsbad is known for its quality product and quality tenant base and this is fueling renewed activity in the area," he said. "More than 4.6 million square feet of new industrial and R&D space was added in Carlsbad over the past seven years. Fortunately, with no new construction under way or planned, the area is absorbing the excess supply. We could see the industrial vacancy rate dip below 10 percent by year-end if momentum continues."

The North County office market -- which encompasses the cities of Del Mar, Encinitas, Solana Beach, Carlsbad, San Marcos, Vista and Oceanside -- has total inventory of 5.25 million square feet in buildings 10,000 square feet and larger. Of this, more than half -- or 2.9 million square feet -- is located in Carlsbad.

"More than 50 percent of Carlsbad's inventory came on line after 1996, and consisted of larger buildings in campus-like settings designed to attract the then growing high tech and research industries," said Ron Miller, senior vice president with Burnham. "The development of this product was driven in part by the availability of relatively inexpensive land, and the recognition that the supply of available land in the more traditional high-tech and biotech markets of Torrey Pines and Sorrento Mesa was limited.

"The subsequent high-tech fallout caused demand in Carlsbad to fall well below its available supply, and vacancy quickly spiked to 33.3 percent in 2001," he said. "Although demand for Carlsbad office space is increasing, evident by positive net absorption of 332,686 square feet last year and another 122,223 square feet so far this year, ongoing construction is preventing any notable decrease in vacancy, which currently stands at 21.2 percent."

Burnham studies show that construction activity in Carlsbad is tapering off, with just one 48,730-square-foot project under way -- the five-building Carlsbad Professional Centre, an office condominium complex that is available for sale. "We should see Carlsbad vacancy decrease notable over the coming 12 months as demand for space picks up and new building activity subsides."

The beach cities combined have just over 1 million square feet of office space in buildings larger than 10,000 square feet, and an additional 121,456 square feet of space in buildings smaller than 10,000 square feet. With few exceptions, most buildings fall into the 10,000-square-foot to 20,000-square-foot range and cater to smaller entrepreneurial businesses whose executives and employees live in the area.

"The boutique office nature of the beach cities contributes to vacancy rates historically lower than countywide averages, and today is no exception," Miller said. "Current vacancy in these submarkets ranges between 8.1 percent and 11.1 percent compared to 12.6 percent for the county. As more and more San Diegans desire to work closer to their homes, demand in these niche submarkets is growing. This is leading to the start of new construction including an 18,750-square-foot building already under way in Solana Beach."

This building is being developed by McMahon Development Group and is already 75 percent pre-leased with Senior Resource Group taking 10,720 square feet. It should be 100 percent occupied upon its completion in March 2004. In addition, Loma Santa Fe Corporate Center just started grading for two buildings totaling 110,000 square feet. This project should be completed by the third quarter of 2004.

Along the Highway 78 Corridor, the cities of Oceanside, San Marcos and Vista offer a combined total of 1.35 million square feet of inventory. While 78 percent of this space is older and classified as Class C product, the area's vacancy rate stands at 4.9 percent, well below the county's 12.6 percent.

"The new Idec facility in Oceanside will likely spawn new office development for tenants who want to be in close proximity to this large pharmaceutical manufacturing facility," Hohenstein said. "However, land prices along the Highway 78 Corridor are more suited for industrial development, which the area has benefited from in recent years."

Grove is president of The Grove Agency.

Related Link

Burnham Real Estate Services: www.burnhamrealestate.com