San Diego Business Journal

Entrepreneurs ‘Leaving Garages,’ Seeking Additional Office Space

REAL ESTATE: Some Firms Finding Spaces in Area’s Prime Submarkets By Lou Hirsh Monday, April 16, 2012

Information technology services provider ServiceNow recently became one of San Diego’s biggest corporate movers of 2012, signing a lease to occupy a full three-story building at University Towne Center — totaling nearly 95,000 square feet — that it will soon call home.

Experts say signings of that size are a rarity in the current climate, where new construction remains scarce and companies seeking more than 20,000 square feet in one place — within prime submarkets — have to look far and wide, and often for a long time, for space that suits their needs.

Those seeking smaller spaces have more to choose from — with rent and other incentives thrown in by landlords — as data show San Diego County’s office vacancy rates still dropping relatively slowly despite improvement in the economy during the past two years.

The brokerage firm Cushman & Wakefield put the region’s direct vacancy rate at 14.1 percent at the end of the first quarter, down from 15.3 percent in the same period of 2011. The overall vacancy rate, with available sublease space included, went from 16.8 percent a year ago to 15.8 percent in the latest quarter.

Chris High, an associate director in the San Diego office of Cushman & Wakefield, said landlords in high-demand markets — such as UTC, Del Mar Heights and Mission Valley — have been trimming incentives, and rents have begun ticking up after several months of stagnation. The popular submarkets are also hearing talk and planning for new construction projects.

“We’re definitely seeing signs of a turnaround in terms of activity and deal flow,” High said. “Entrepreneurs are leaving garages and looking for more space.”

The flight-to-quality trend of 2011 remains a force in 2012, as properties in some submarkets, vacated by firms finding better deals elsewhere, remain unfilled.

Leasing Activity Rises

However, brokerage firm CBRE notes that the overall region’s absorption of unused space has remained positive for 10 consecutive quarters. While San Diego remains a tale of several office submarkets with varied supply-and-demand dynamics, overall leasing activity in the first quarter was slightly higher than the prior quarter, at just under 1.37 million square feet, the firm reported.

According to CoStar Group, tenants moving into large blocks of space in 2012 include Illumina Inc., taking 159,272 square feet at UTC; Synthetic Genomics Inc., moving into 34,903 square feet at Torrey Pines; and the state of California, taking 25,728 square feet at Carmel Mountain Ranch.

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