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Improving Employment Picture Is Boost for the Office Market

An improved employment picture in 2011’s first quarter helped stabilize San Diego County’s office market, as vacancy rates continued a gradual drop amid five consecutive quarters of positive space absorption.

According to local brokerage firms, the quarter’s largest office property purchases included HCP Inc.’s acquisition of a UTC office complex for $67.2 million; Cruzan Monroe’s purchase of the two-building Centrewest Plaza in Sorrento Mesa for $18.4 million; and MIG Real Estate LLC’s purchase of a two-building UTC complex for $15 million.

The largest new office leasings include the FBI’s agreement to take 248,882 square feet in a field office being built in Sorrento Mesa; The Active Network Inc.’s lease of 101,446 square feet in Sorrento Mesa; Encore Capital Group’s lease of 32,503 square feet at Centerside in Mission Valley; and the lease by PayChex Inc. of 30,425 square feet at Scripps Ranch Technology Park.

“The market has been moving in the right direction over the past year, with consistent positive absorption and decreasing vacancy,” said Chris Wood, managing director in the San Diego office of Voit Real Estate Services.

TheVacancy Rate

The San Diego office of Cushman & Wakefield said positive net absorption in the first quarter totaled just over 286,000 square feet, dropping the county’s direct vacancy rate slightly to 15.3 percent, down from 15.7 percent at the end of 2010.

The local “flight to quality” trend continued, with Class A office sites accounting for two-thirds of the quarter’s absorption.

Cushman noted that office development activity remains stagnant, with no new speculative construction expected to break ground this year without substantial tenant commitments. The only significant project under construction at the end of March was an 83,000-square-foot building at Discovery Corporate Center in Rancho Bernardo, where about 67 percent of the space had been reserved.

The local office of brokerage firm Jones Lang LaSalle noted that the San Diego region’s gain of 20,000 jobs in the past year, including 5,200 during the month of February, should provide encouragement to landlords as companies add to their payrolls.

However, tenants still have the upper hand in the majority of transactions, although their time horizon to secure major discounts, like those seen over the past two years, may be waning.

Scot Ginsburg, a managing director in Jones Lang LaSalle’s San Diego office, said the office market continues to rise gradually off the bottom, as corporate downsizing tapers off and hiring improves. Also, tenants increasingly are opting for five-year lease renewals, rather than the two years they might have preferred a year ago, in order to lock in low lease rates that might not last in the improving economy.

The Employment Outlook

JLL cited a recent Business Roundtable survey, which found that 57 percent of U.S. chief executive officers surveyed planned to ramp up hiring in coming quarters.

Ginsburg said as Class A properties are snapped up, more space in B properties has become available around San Diego County.

Rent and vacancy conditions of the first quarter will likely remain intact for at least an additional quarter or two, he said.

“Are the rents going up much? Not at this point, but you could see it happening a few months down the road,” Ginsburg said. “Right now the landlords are doing what they need to do to maintain occupancy.”

Rising occupancy in turn helps attract building investors, who have been coming off the sidelines to buy properties since late 2010.

Key factors to watch will include whether tech-oriented firms see a return to the levels of venture funding approaching what was available before the recession. Ginsburg said venture funding will impact location decisions, as well as moves to add workers, which in turn could boost demand for office space.

A first quarter report by the brokerage firm Cassidy Turley BRE Commercial forecasts that demand for space should improve gradually throughout 2011 and strengthen in 2012, as businesses gain confidence in the recovery of the national and local economies and increase hiring.

The first quarter picture varies markedly among San Diego County submarkets. Cassidy Turley notes that three submarkets saw decreases of more than five percentage points in direct vacancy from a year ago — Rancho Bernardo, National City and east Chula Vista.

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