March 22, 2007 – Moderate Year Predicted for San Diego’s Office Market
Article Date: 03/22/07
BSS Consulting
Full Story:
San Diego County’s office market is poised for moderate activity over the coming year, thanks in part to slower but still positive employment growth and a stable foundation in professional services that supports the region’s diversified economy. According to the latest research from Burnham Real Estate Services’ 2007 Outlook report, San Diego office net absorption should stabilize at 2 msf annually over the next two years, up slightly from 1.8 msf in 2006 and down from 2.5 msf of absorption in 2005.
“Companies in general are more cautious than a year ago, now weighing costs carefully in light of significantly higher rental rates for Class A properties in preferred locations,” said Ron Miller, Senior Vice President with Burnham Real Estate. “In 2007, we expect to see some movement to more conservatively priced Class B space as price conscious companies recognize that refurbished second generation space is a viable alternative to more expensive options.”
“Developers have confidence in the long-term outlook for the San Diego office market, and the 3.9 msf of space currently under construction represents an 11-year high,” adds Miller. “Approximately 3.1 msf of this space will complete this year, most of which is speculative.
“Although there is an additional 4.5 msf of space planned to start construction over the next two years, we believe a temporary oversupply of space in 2007 may cause some of these projects to be postponed,” he said. “As a result, we expect vacancy on total inventory including owner-user buildings to increase from 10.3 percent to 12.4 percent in 2007, due primarily to the new construction.”
The Burnham Outlook report shows average countywide office rental rates currently stand at $2.15 per square foot, with Class A properties in premiere markets like Del Mar Heights and UTC approaching $4.00 per square foot. “Even Class A product in markets like Mission Valley are seeing moderate rate increases approaching $3.00 per square foot,” Miller said. “We project that average countywide office rents will increase 4 percent to $2.24 by this year-end and by just under 1 percent to $2.26 by the close of 2008.”
San Diego office acquisitions have slowed slightly due to the fact that inventory for sale has declined, however, Mark Wayne, Senior Vice President with Burnham Real Estate, noted that the appetite for all office product types is very strong, particularly by institutional investors who recognize the region’s long-term investment appeal. “Properties continue to trade at record-high prices, though there is an increased focus on current and projected property performance,” he said.
In 2006, GE/Arden Realty, The Irvine Group, Shidler Group and AEW Capital Management were just a few investors making value-add plays. “In 2007, we expect to see an increase in office buildings offered for sale by REITs acquired by private companies, a trend that continues to have strong momentum,” Wayne said.
According to Burnham Real Estate’s Jennifer Gallivan, the Broadway 655 tower (recently renamed Advanced Equities Plaza) in downtown San Diego has been listed for sale with multiple investment groups underwriting the offering which is expected to generate final pricing above $500 per square foot.
“The tower has achieved 82 percent occupancy since its completion in 2005 and is one of just two new high-rises completed in downtown in the past 14 years,” she said. “The Irvine Company, which has purchased six downtown high-rises over the past four years, continues to pursue opportunities, as evidenced by its recent acquisition of the Bosa site on the northeast corner of Broadway and Pacific Highway for another office tower.”
Generally speaking, Gallivan said that downtown San Diego will be stable in 2007, with vacancy rising slightly to 12 percent when Cisterra’s DiamondView Tower at PETCO Park is completed in the second quarter. “Older downtown buildings continue to be cost-effective alternatives to newer Class A space where rates are now topping $3 per square foot,” she said. “450 B Street will be a very competitive Class B option in 2007, with extensive renovations about to start and pricing below the competitive set.”
The Burnham report projects that average asking rents downtown are expected to increase 10 percent over the next two years, rising from $2.60 to $2.86 per square foot.
UTC’s long-term investment potential is clearly apparent with two recent headline-making acquisitions. “In the biggest leveraged buyout in history, Blackstone Group LP won a bidding contest for Equity Office, UTC’s major landlord, for $39 bil,” Wayne said. “This group of properties is now being sold to The Irvine Company. Additionally, Morgan Stanley Real Estate purchased Glenborough Realty, who owns The Aventine in UTC, for $1.9 bil.”
Burnham research shows that low-rise flex office space in Eastgate made up all of UTC’s 56.2k sf of positive net absorption in 2006. In Eastgate, Qualcomm signed two leases totaling over $13 mil for 107.6k sf of space, and Amylin Pharmaceuticals signed an $11.3 mil lease for 53.8k sf of space. Pharmaceutical Research Associates signed a $9.94 mil lease for 25.6k sf of space in traditional Class A UTC product at University Pacific Centre.
Wayne says that there is about 400k sf of new office space under construction in UTC. Projects include Hines Development’s 340k sf La Jolla Commons office project, which will be complemented with a W Hotel and a high-rise condominium project; and Carr America/Blackstone’s 45k sf SR-zoned La Jolla Commons Pavilion.
“Current average UTC asking rents of $3.20 per square foot are expected to increase by 4.6 percent to $3.35 per square foot in 2008,” Wayne said. “Class A space, should increase from $3.50 per square foot to $3.66 over the same period.”
In Del Mar Heights, sustained strong demand and limited available supply has generated a high volume of leasing activity in this popular submarket. Several premiere projects came on line in 2006 and big national law firms were quick to lock in space. Baker & McKenzie LLP signed a $14.9 mil lease for 28.9k sf in Plaza Del Mar III; Sheppard Mullin Richter & Hampton LLP signed a $27 mil lease for 54.2k sf in Paseo Del Mar; and Pillsbury Winthrop Shaw Pittman LLP signed a $12.2 mil lease for 25.5k sf, also in Paseo Del Mar.
“Some of the highest rents in the county were realized on these transactions and asking rates for Class A space in this premier submarket are approaching $4.00 per square foot,” said Wayne. “Overall average asking rents of $3.35 per square foot are expected to increase 1.5 percent to $3.40 per square foot in 2008.”
The 2007 Burnham report shows nearly 900k sf of new office space under way in the I-15 Corridor with more in the pipeline. “Notable projects include the nearly complete 108.8k sf Pinnacle Executive Center in Rancho Bernardo and the 150.7k sf Scripps Health building in Carmel Mountain Ranch,” said Tom van Betten, Vice President with Burnham Real Estate. “Additionally, Jay Paul Company plans to construct up to 3.2 msf of Class A office space on the 105-acre site they purchased in 2006, which includes The Summit and the former Sony picture tube facility.”
Fourth quarter 2006 sales transactions included Embarcadero Capital Partners’ acquisition of the 244k sf Scripps Corporate Plaza; General Atomics’ acquisition of the 151k sf Bernardo Technology Center; and Transwestern Investment Company’s acquisition of the 111.5k sf Plaza at Scripps Northridge project. “In the second quarter of 2006, LBA purchased a single-tenant 110k sf building after negotiating a buyout with the tenant, and is now marketing the building on a multi-tenant basis under the new name of Willow Creek Corporate Center,” van Betten said.
In 2006, Intel vacated three buildings, but tenant move-ins elsewhere within the submarket helped offset the negative 40.1k sf of net absorption in 2006. Two of the former Intel buildings were purchased by Kilroy Realty and are now being marketed under the name of Evening Creek Corporate Center.
“Current average I-15 Corridor asking rents over all office product classes of $2.17 per square foot are expected to increase 5 percent to $2.27 per square foot in 2008,” van Betten said.
According to Wayne, several high-profile construction projects in Kearny Mesa are helping to demonstrate the submarket’s repositioning as a significant development/redevelopment epicenter for high-end office and medical product in San Diego. “Projects under way include Class A, B+ and medical space, the latter of which is popular due to the proximity to Sharp Hospital,” he said.
Sunroad Centrum, Phase 1, the first of three office towers planned in San Diego Spectrum, a 1 msfmaster-planned campus, may deliver in summer 2007. The tower is 12 stories tall and totals 295k sf. Other projects include Spectrum Corporate Plaza, a two-building 130k sf project; and Cabrillo Medical Center, a three-story 31k sf Class A medical office building.
“Average Kearny Mesa asking rents of $1.85 per square foot are expected to increase 5.4 percent to $1.95 per square foot in 2008,” Wayne said.
According to Miller, Mission Valley is beginning to see a flight from quality as tenants look to avoid the increasing rental rates for newer Class A properties, which are reaching nearly $3.00 per square foot.
“Class B and B+ space is priced approximately 15 to 20 percent less per square foot and landlords are maintaining the buildings in a first-class, well-kept, clean and refurbished basis to capture those tenants who will not pay the higher Class A rates,” Miller said. “In 2006, Mission Valley saw a substantial number of deals recorded among all classes and size ranges thanks to steady growth among insurance and financial companies, law firms and professional service firms. In addition, Mission Valley’s centrality and amenity base continues to draw tenants from other submarkets such as Downtown and Kearny Mesa.”
Some notable deals in 2006 include RSM McGladrey (22.5k sf), Sundt Construction (15.3k sf) and Xerox (10.2k sf). Miller projects that average asking rents over all office product classes of $1.99 per square foot are expected to increase 5.5 percent to $2.10 per square foot in 2008.
Sorrento Mesa remains the county’s hottest office market to-date with 1.23 msf of net absorption in 2006 – the highest of any San Diego County submarket. The majority of this positive absorption was due to Qualcomm’s move into its new Class A, 10- and 12-story high rises totaling 990k sf, as well as Gen-Probe’s move into its new 291k sf building.
In the largest San Diego lease transaction of 2006, Cardinal Health signed a 10-year 318k sf lease for a Kilroy build-to-suit and neighboring 93k sf building. Other activity includes Turner Construction (20.5k sf) and Altera Corporation (28.5k sf). The Active Network, Kintera, Novatel Wireless and Parexel International also committed to leases or expansions totaling over 125k sf of space last year. Looking forward, average asking rents of $2.09 per square foot are expected to increase 7.6 percent to $2.25 per square foot in 2008.
“Sorrento Mesa’s development pipeline will continue to be very active in 2007,” Miller said. “In addition to the recently completed 145k sf Pacific Center III, Kilroy’s 318k sf Cardinal Health building is well under way, and Maguire’s 12-story 317k sf San Diego Tech Center building is scheduled to break ground in the second quarter of 2007.”
Carlsbad leads the county in new construction with nearly 600k sf under way and over 500k sf completed in the last year. Office properties completed include Ocean Ridge (75k sf), Kelly Corporate Center IV ( 75.2k sf), Centerpointe Plaza (100k sf), Aston Corporate Center (60k sf) and most recently the Concourse One (75k sf).
“Small buildings for sale and build-to-suit opportunities are either available or under construction in Bressi Ranch Corporate Center, Palomar Oaks North, and Carlsbad ForumRaceway,” said John Hoffmann, Senior Vice President in Burnham Real Estate’s Carlsbad office. “As a result, Carlsbad vacancy is likely to top that of other submarkets as the new inventory takes time to absorb. Over 50 percent of the overall vacancy will be in new, shell buildings.”
2006 Carlsbad leases included JPI Development Services (16.6k sf), Altium Inc. (16.9k sf), Catalina Restaurant Group (14.4k sf) and Yahoo Inc (18.5k sf).
“Average asking rents are $2.78 per square foot for Class A office buildings,” Hoffmann said. “Average rents for Class A and B space combined are $2.37 per square foot and are expected to increase 8 percent to $2.55 per square foot in 2008.”
__________________
Originally Posted by TREPYE "...all you do is kiss this Freedom Tower's ass all the time..."
Originally Posted by kznyc2k " but you just have a really, really huge boner for this tower, D..."
|
Prev
Linear Mode
