Special to the Business Journal
The San Diego County office market is on pace to surpass 1999’s decade-high record in new construction.
Nearly 800,000 square feet has already been completed and another 3.1 million square feet is under way, of which 2.6 million is expected to be completed this year.
That totals 3.4 million square feet , a 17 percent increase over the 2.9 million square feet completed in 1999.
While some real estate pundits last year expressed concern about overbuilding San Diego’s office market, which consequently prompted some developers to temporarily put a few projects on hold, it appears that many of those projects are now moving forward.
This continued surge in new construction is totally demand-driven, with strong real estate fundamentals in place.
First-quarter net absorption exceeded 1 million square feet, topping 1999 fourth quarter’s net absorption of 717,000 square feet. This early strong demand represents half of all last year’s net absorption, and given healthy pre-leasing activity, the second and third quarters will also post high-net absorption figures.
– About Half Of New
Space Is Pre-Leased
A review of the projects currently under construction indicates that 52 percent of the total square footage is already pre-leased.
It is interesting to note the change in the type of office building being built. The “flex” office, a two-story configuration with tilt-up paneled walls and large floor plates, is now being replaced by the construction of traditional low-rise and mid-rise buildings.
Last year, “flex” office accounted for 53 percent of the total construction in the county. This year, that figure has dropped to 26 percent, whereas low-rise and mid-rise buildings represent 32 percent and 42 percent of the current construction, respectively.
The suburban Class A office market rents have risen to the point where this type of construction is now feasible.
– Active Submarkets
For New Construction
The four most active submarkets for new construction are Del Mar Heights, University Towne Centre, Scripps Ranch and Sorrento Mesa.
This is not surprising given that much of the construction is driven by San Diego’s strong base of cluster or growth industries (telecommunications, software, biotechnology, etc.). The tenant activity in these industries throughout the region is currently healthy and hopefully resilient to the stock market’s volatility.
Because of the strong demand, the countywide office vacancy rate fell to 9.4 percent from 1999’s close of 10.1 percent.
This is only the second time in 20 years that the vacancy rate has fallen below the 10 percent mark. Many of the submarkets’ vacancies are below 5 percent. Although a slight increase in the vacancy rate for 2000 was initially forecasted, it appears that it should remain below 10 percent.
Wayne and Miller are senior vice presidents at Burnham Real Estate Services.
