San Diego Business Journal

Office vacancy rates in the county reached a 10-year high in the third quarter, according to a recent office market report released by Colliers International Property Consultants' San Diego office. Colliers International, with offices in Carlsbad and San Diego, reported vacancy rates have grown for five consecutive quarters and exceeded national vacancy averages for the first time in a decade.

According to the report released Nov. 16, Colliers found that the countywide vacancy rate for all classes of office space increased by 0.8 percent to 13.1 percent from the previous quarter.

"The amount of construction being developed right now has totally out-paced the rate of absorption," said Christopher Reutz, director of research at Colliers International San Diego.

Reutz said the double-digit vacancy rate is not horribly high, just above the lower rates of the past few years.

"We are on average with the national number," he stressed. "Just slightly over it this quarter. It probably sounds a little more exciting than it really is. It is not a particularly alarming number. We are not on the lower end of the national average; we are on the upper end right now."

The report stated that if this imbalance of supply and demand continues it could cause vacancy rates to increase further. With more than 1.6 million square feet of office space expected to be delivered in the fourth quarter, Colliers said new office construction could push the vacancy rate to 14 percent by year-end. Yet Reutz projects vacancy rates to dip in the fourth quarter of this year based on lease and sales transactions during the past month and a half.

Since second quarter 2006, countywide vacancy has slowly increased from a low of 8.9 percent, according to Colliers. During the same five-quarter period, Colliers reports net absorption of 190,400 square feet and 3.2 million square feet of construction activity.

Jeb Bakke, senior vice president of CB Richard Ellis real estate services in San Diego, said vacancy rates are only one measure to consider when evaluating the healthiness of the market.

"There are always positives if you look for them," he said. "The well-located, well-designed products are going to be fine. They might lease up just a little bit slower than they would have two to three years ago because of the psychology of the economy, but they will come out fine."

Bakke said education, defense, government and software companies are still looking for available space in San Diego despite much "sideline sitting" due to the uncertainty in the market.

According to CB Richard Ellis data on the San Diego office market, the second quarter of 2007 had the highest vacancy rate in 10 years at 12.2 percent. CBRE reported a 12 percent vacancy rate in the third quarter. CBRE reported that of the 53.5 million square feet of office space in the county, 6.4 million square feet was vacant last quarter.

It also found that the 10-year average vacancy rate was 9.3 percent, or 4.3 million square feet, of office space.

Grubb & Ellis/BRE Commercial noted that third-quarter absorption was the largest since the fourth quarter of 2005. The commercial brokerage reported a net absorption of 609,000 square feet in the third quarter and a total of 992,000 square feet of office space this year.

Vacancies Inch Up

Despite the positive demand, the countywide vacancy rate increased for a seventh consecutive quarter to 11 percent, up slightly from 10.9 percent in the second quarter due to construction completions, according to Grubb & Ellis. It also found double-digit vacancy rates in the submarkets of Rancho Bernardo, Carlsbad and downtown due to recent office building completions. These submarkets are expected to temporarily remain about their historical vacancy rate averages until the new inventory is occupied.

Jesse Gundersheim, senior research analyst with Grubb & Ellis, reported that San Diego's third-quarter office market statistics were largely shaped by two national companies. He said General Atomics signed a lease for 155,000 square feet at Parkway Business Center in Poway and Mountain View-based Intuit Inc. into 500,000 square feet at Santa Fe Summit off Highway 56.

"Both deals exemplify the trend of corporate consolidation from multiple locations, or expansion from smaller locations into large contiguous blocks of available space," he said in the report.

LoopNet Inc., a commercial real estate listing service with offices in Los Angeles and San Francisco, said several significant transactions closed in the third quarter, including the sale of Regents I and II on Executive Square in University Towne Center for $223 million, or $716 per square foot; Del Mar Corporate Plaza on High Bluff Drive in Del Mar Heights for $67.5 million, or $543 per square foot; and Chancellor Park on Executive Drive in UTC for $91.3 million, or $466 per square foot.

The sale of these three properties shifted ownership of more than 640,000 square feet of Class A office space.

LoopNet lists top buyers this year, including Newport Beach-based the Irvine Co. and Arden Realty Inc. of Los Angeles. Top sellers of 2007 were New York-based Blackstone, Equity Office of Chicago, Maguire Properties of Los Angeles and San Diego-based Lankford & Associates Inc.