Otay Mesa is leading San Diego County in an industrial leasing rebound that could signal the beginning of stabilization in the commercial real estate markets, a report by Burnham Real Estate Services shows.

In Burnham's midyear market update, Otay Mesa accounts for all but 100,000 square feet of the almost 1.2 million square feet of countywide year-to-date net absorption. Even more significant is the fact that the county's second-quarter net absorption surged to 1,414,327 square feet -- a remarkable recovery following 244,294 square feet of negative net absorption during the first three months of the year.

"We predicted that industrial leasing would regain momentum during 2003 with most new activity occurring in the southern and northern regions of the county where there is more reasonably priced land for development," said Joe Smith, a senior vice president with Burnham Real Estate Services. "Otay Mesa has retained its position as countywide leader in net absorption, due in part to improving industrial absorption in Mexico as well as to a surge in new residential and retail development that gives companies access to a variety of nearby housing and services for their employees."

Charles Adolphe, a vice president and South County industrial leasing specialist with Burnham, notes that the San Diego County market is on track to surpass last year's total net absorption of 2.6 million square feet -- an additional indicator 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," Adolphe said. "Most economists are still predicting a slow but steady national recovery toward the end of 2003. Because San Diego's downturn was not as severe, recovery here could begin even earlier."

With the exception of Otay Mesa, the first quarter of 2003 showed negative net absorption in virtually every San Diego County industrial submarket. The 218,673 square feet of activity reported by Otay Mesa for the three months ending March 31, was followed by positive second-quarter absorption in almost every submarket. Otay Mesa led the way again in the second quarter, with 847,558 square feet of net activity, 600,000 square feet of which was accounted for by the June occupancy of the new Factory 2-U (Nasdaq: FTUS) distribution center.

"While the Factory 2-U completion is significant, we also saw 247,600 square feet of net absorption in seven other projects throughout Otay Mesa," Adolphe said. "This activity indicates obvious improvement in the leasing climate, and we expect it will continue to improve over the next several months."

San Diego County industrial vacancy stands at 8.4 percent, one of its lowest rates since the start of the 1996 real estate recovery. "Overall, industrial vacancy has remained relatively stable, hovering in the mid-8-percent range for the past three and half years," Adolphe said. "This stability is due to the fact that from a countywide standpoint, the market is not overbuilt. With just a few exceptions, there is very little excess supply."

In Otay Mesa, industrial vacancy has fallen from 19.6 percent to 12 percent so far this year, and will drop even further as absorption gains steam. "Warehouse leasing activity is picking up on this side of the border," Smith said, "and this is usually a good sign that manufacturing activity in Mexico will continue to improve six to 18 months out."

Driving growth in Otay Mesa is the fact that a growing number of employers and residents are re-discovering the South County region as a place to live, work and play.

The master-planned EastLake community was the first to bring homes to the South Bay and set the standard for other developments to emulate. Add in Rancho del Rey and the 23,000-acre Otay Ranch, and South County has an abundance of quality housing in various price ranges including million dollar plus executive homes.

Office development is following residential development, and Chula Vista last year welcomed the first phase of Gateway Chula Vista, a multi-use office and retail center that serves as the southern entrance to Chula Vista's downtown corridor. Nearly completely leased, tenants in the first phase include San Diego County Credit Union, Velure Land Investments, Global Fax Network, United Title Escrow, U.S. Attorney's Office and Chiyoda Integra of Tokyo (PNK: CYDGF). Two more phases are proposed, each totaling 122,235 square feet, and the second phase is expected to break ground in 2004.

Also supporting the growth of South County, and Otay Mesa in particular, is the scheduled completion of the SR-125 tollway in 2005 that will provide a third north-south connector from the border all the way to Santee.

Where industrial construction is concerned, Burnham studies show that all of the county's new development is located in South County (in Otay Mesa, with 257,972 square feet under way), and in the north county communities of Oceanside, Vista and San Marcos (1.2 million square feet).

"The 1.7 million square feet of space being built countywide is well below the 14.8 million square feet of new space that came on line during the record years of 1997, 1998 and 1999 -- an average of 4.9 million square feet per year," Smith said. "The limited supply of land for industrial development -- particularly in the mid-county markets -- will prevent overbuilding from occurring. It will also drive most near-term new construction to areas like Otay Mesa. Currently, more than half of the county's non-retail employment land is in South County, with 5,349 acres available for development -- more than 2,100 of which are in Otay Mesa."

Grove is president of The Grove Agency Inc.

Burnham Real Estate Services: www.burnhamrealestate.co