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Experts Predict Supply, Demand to Balance Out This Year

Higher Than Expected Vacancy Rates to Decline

The 1990s were a volatile decade for North San Diego County’s R & D;/industrial market, which has weathered extreme highs and lows.

As the new millennium begins, numerous factors at work are contributing to the overall economy. The nation is experiencing what most experts agree is a leveling of our current business cycle, which is being fueled by a combination of low interest rates, surging stock prices, an expanding population, and the lowest unemployment rate in the last 40 years.

These strong market forces, combined with historically low vacancy rates for North County, led to a tremendous surge in building activity during the latter part of 1998 and 1999.

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This increase in building outpaced demand, pushing vacancy rates significantly higher than expected in 2000. For example, Vista, with a 1999 base of 10.5 million square feet, currently has a vacancy rate of about 15 percent. Carlsbad, which has a 1999 base of approximately 12.2 million square feet, has a current vacancy rate of 20 percent.

This is a far cry from the 5 percent vacancy rate we experienced in the mid-1990s, which triggered the explosive building growth we have experienced in the past two years.

The building increase is not the only contributor to these high vacancy rates. The economic slowdown in foreign markets, particularly in Asia, has strongly affected a number of local light-manufacturing companies, causing them to downsize.

– Growth Factors Unable

To Offset Building Surge

Historically, demand in real estate markets has been driven by requirements from local companies that have experienced rapid growth during the last 10 years, thus becoming financially strong and major forces in their industries. The decline in the overseas markets has, in some cases, seriously impacted the growth of these companies.

While growth in high technology is up and unemployment is down significantly, to date it has not been enough to offset the effects caused by the tremendous building surge and declining foreign markets.

However, financial markets have acted like a circuit breaker and have curtailed future development in the face of these excessive vacancy rates. The increasing cost of land, along with higher building fees and the existing vacancies, will prevent any further speculative building in the immediate future, allowing supply and demand to reach equilibrium. Most projections are for vacancy rates to decline significantly during 2000.

Many of the submarkets in San Diego experienced the same overbuilding phenomenon as North County, but some have rebounded at a faster pace. Markets such as Sorrento Mesa had high vacancy rates during early 1999, but experienced significant growth during the third and fourth quarter, pushing vacancies lower in 2000.

The market in Poway, which has experienced growth similar to North County in recent years, has not experienced the same increase in vacancy rates. Most of its growth was due to build-to-suits rather than speculative construction.

Most experts are optimistic about 2000 and believe North County vacancy rates should drop significantly during the first and second quarters. Between 30 and 50 percent of the available inventory of buildings is concentrated in large buildings within several developments. If some of the large transactions currently pending are completed, we could see a considerable reduction in vacancies by mid-2000.

– North County Is

Positioned Well For 2000

Today, much of the demand in North County is driven by companies expanding from outside this immediate geographic area. Activity has also increased in other areas of the county, as well as Orange and Los Angeles counties to the north.

Qualified employees and affordable housing are areas of prime importance when attracting companies to North County, which compares favorably to the competition. North County offers a range of housing, from the most expensive to the most affordable, all within a 20-minute commute to any of its business parks.

Finding qualified employees can be a concern with unemployment at 2.5 percent in San Diego County. However, North County offers a diverse employment base with a disproportionate share of highly skilled employees. North County is also well-positioned to compete with lease rates offered both further south in the county or to the north in Orange County.

By continuing to emphasize its strengths, experts expect North County to witness a sharp decline of vacancy rates by mid-2000.

While it is a major part of San Diego County’s economic success today, North County is destined to become an even more important factor in the new millennium.

King and Onosko are senior vice presidents and founding partners of Coldwell Banker Commercial – North County Properties.

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