The San Diego County office market is in the midst of a transition.
With vacancy increasing with the completion of almost 2.8 million square feet of office construction in the first three quarters of 2007,along with another 1.9 million square feet scheduled to be completed next quarter,some challenges exist.
The region’s strong economy and high quality of life continue to make it a desirable location for business. The growing influence of industries such as biotechnology, technology and healthcare should continue to diversify the local economy and help to support further growth in the office market. These industries will increase employment opportunities and help to ease vacancy rate concerns in the coming quarters.
The average asking full service gross monthly lease rate per foot is $2.71, which is a 4.23% increase from last year’s third-quarter rate of $2.60, and is two cents higher than the second quarter’s record high. Class A rates for the county are averaging $3.04 full service gross, breaking the three-dollar mark for the first time, and are the highest in the submarket at $3.40.
This upward trend should begin to ease as we approach the end of 2007, as a result of another 1.9 million square feet of construction coming to market next quarter.
The office vacancy rate is at 11.3%, constituting a 7.7% increase from last year’s third-quarter rate of 10.5%. This sub-12% level has encouraged construction and put upward pressure on lease rates.
The office absorption checked in at 1.1 million square feet for third quarter 2007, giving the San Diego office market a total of about 2.1 million square feet of absorption for the first three quarters of 2007.
Currently there is 3.4 million square feet of office construction under way. Total construction is lower than it was a year ago when 4.7 million square feet was under construction. This is a decrease of almost 30% when compared to last year.
Planned office construction in San Diego County is down compared to last year. Currently there is almost 9.9 million square feet of office space on the slate as being planned, compared to last year’s figure of 9.97 million square feet.
Unemployment in third quarter 2007 in San Diego County was 4.8%, which is 0.6% higher than it was when compared to second quarter 2007, and 0.7% higher than it was a year ago.
According to the Los Angeles County Economic Development Corp. it is estimated that San Diego County will add 11,800 non-farm jobs in 2007, and it is forecasting 19,500 new jobs in 2008. It also forecasts a 3.5% gain in total personal income with inflation increasing by 2.5% for 2007.
Rental rates are expected to continue to increase at moderate levels in the immediate future. Concessions should begin to increase in the short run in the forms of initial free rent, reduced parking fees, relocation money and tenant improvement allowances, as new space becomes available. We should see annual lease rate growth of at least 3% to 5% continuing through 2007.
Industrial Market
The industrial vacancy rate was at 6.28% for the third quarter, which is a little higher than it was a year ago when it was 6.21%. The lowest vacancy rate in the county can be found in the East County submarket, coming in at 3.27%.
This lack of supply is creating constrained demand for industrial space in the San Diego County area and is putting upward pressure on lease rates. The average asking triple-net lease rate per month per foot in San Diego County is at 75 cents, which is an increase of 4.17% when compared to last year’s figure, and represents a new record.
The highest rates in the county can be found in the Interstate 15 Corridor submarket, where the average asking lease rate is 99 cents per square foot. Rents are expected to increase 5% to 7% in 2007 as the economy continues to expand.
Industrial absorption registered 322,821 square feet during the third quarter, giving the San Diego Industrial Market a total of 407,570 square feet of positive absorption for the first three quarters of 2007. Most of the positive absorption was in the I-15 Corridor, north city and North County submarkets.
Unemployment in the third quarter in San Diego County is 4.8%, which is 0.6% higher than it was when compared to second quarter 2007, and 0.7% higher than it was a year ago.
Currently there is 841,648 square feet of industrial construction under way, and total construction is down just more than 50% when compared to a year ago. This slowdown is due to increasing land and construction costs.
Planned industrial construction in San Diego County is up compared to last year. Currently there is 3.4 million square feet of industrial space on the slate as being planned, compared to last year’s figure of 3.3 million square feet.
Analysis provided by Voit Commercial Brokerage LP.
