If past trends are an indication, says local commercial real estate broker Tom van Betten, the coming year could see the continuing emergence of two distinctly different supply-and-demand realities for office users scouting new space in the San Diego region.
Those seeking out less than 20,000 square feet will likely find appropriate sites available throughout the county at reasonable rates, if they are willing to look beyond the most prime locations and especially if the corporate world continues to do more with less, including downsizing office footprints.
However, larger companies that are in growth mode — and looking to consolidate operations into one place for ideal efficiencies — could be more hard-pressed to find appropriate Class A locations, and will likely pay premium prices when those spots become available. Commercial construction remains stuck well below pre-recession levels, and speculative building is showing few signs of making a comeback at the moment.
The local market has few full-floor or full-building spaces remaining in the most sought-after neighborhoods.
“There’s going to be a real challenge with availabilities for companies looking for big spaces,” said van Betten, a tenant representation specialist with Cassidy Turley San Diego. “You could see the gap growing between what some of these larger companies require, and what’s actually out there.”
Van Betten, among panelists at San Diego Business Journal’s recent economic trends forum, says the situation could have long-term implications for the local region’s ability to attract and retain large companies in industries looking to expand here.
The commercial real estate world — like most industries — will be watching in 2013 for the potential impacts of recent talks in Washington, D.C., over how to cure federal budget woes through combinations of tax increases and program funding cuts. Anything that impacts job growth could in turn affect office space demand in major metro markets including San Diego.
Much of the current activity in the local market has not been impacted by the “fiscal cliff” debates on Capitol Hill, and the local economy generally is diverse enough to sustain momentum at least for the near term.
While local defense-related contractors have been scaling back their office space during the past year — primarily due to Pentagon programs that were already winding down, but also in anticipation of future military cuts — van Betten notes that firms in other industries continue to boost their local footprints, especially in the realms of Internet, wireless and life-science technologies.
Follow the Leaders
Wireless giant Qualcomm Inc. continues to expand into leased sites throughout Sorrento Mesa and neighboring submarkets, and other big and small technology players are angling to be in Qualcomm’s vicinity.
A similar dynamic is playing out in the life-science hubs of Torrey Pines and Sorrento Mesa, where global firms like Shire Plc are expanding their presence and others in the industry are following suit, spurring building owners to make big investments in competitive upgrades to retain and attract tenants.
Elsewhere, van Betten said there are scattered situations where the needs of growing tenants are being met through build-to-suit arrangements, where the owner of the property is building specifically to accommodate a large tenant.
For instance, developer Hines has a tower under construction at UTC that will be fully occupied by LPL Financial, which is consolidating local operations now housed at several locations.
However, he said only the largest local office landlords — such as Hines, Irvine Co. and Kilroy Realty Corp. — have the land and other resources available to carry out build-to-suit projects such as high-rises.
Elsewhere in the county, land availability and new-construction financing remains constrained for most office developers. Even the largest developers remain hesitant in the current market to proceed with speculative building projects, preferring instead to have tenants lined up before breaking ground.
“You could see the possibility of spec building increasing in the next year or so, but with spec projects that investor is looking at a two-year lead time before that building could be finished and occupied,” van Betten said.