By THOR  KAMBAN  BIBERMAN  ,  The  Daily  Transcript

Thursday, August 15, 2013

 San Diego County’s office market continues to improve, and that includes having has more full buildings than any time in its history, according to a second-quarter report.

Jones Lang LaSalle (NYSE: JLL) reported that some 66.8 million square feet of office space is currently occupied in the county -- a record level.

“Though vacancy only dropped a handful of basis points over last quarter, year-to-date absorption now totals over 850,000 square feet and new ground breakings are being kept at bay, which is helping to quicken the absorption of existing space,” JLL wrote

JLL pegged the direct office vacancy countywide at 13.6 percent and the overall vacancy rate (which includes sublease space) at 14.4 percent on June 30.

Jessica Chaing, a JLL research analyst, said “the overall office market is faring pretty well.”

Brett Ward, a Cassidy Turley senior vice president, said, “Second- quarter net absorption is more than double the quarterly average of 220,000 square feet since the end of the recession.”

Cushman & Wakefield wrote, “Despite another quiet quarter in the San Diego office market, all indicators remained positive."

Not all submarkets are created equal, however. “In San Diego there are always going to be superstar submarkets,” Chaing said.

One of those submarkets is the University Towne Centre market where The Irvine Co. is gearing up to develop the 306,000-square-foot La Jolla Centre III project at 4655 Executive Drive.

American Assets Trust (NYSE: AAT) has started construction on a planned 80,000-square-foot, five-building expansion to Torrey Reserve by the second quarter of 2015.

Stephen Rosetta, vice chairman of C&W’s San Diego brokerage services, said with rents flat and leasing anemic, speculative construction won’t be justified in most instances.

“The rents would be high enough to justify construction costs,” Rosetta said.

Chaing said The Irvine Co. project will only make sense to start when a large tenant has been identified to anchor it.

“The Irvine Company may be one of the few firms that could make this work,” Rosetta said.

The Irvine Co. meanwhile continues to set the bar on rents on its multi-tenant office portfolio in UTC and in downtown San Diego, where the company owns seven high-rise office buildings.

Mike Hoeck, a CBRE (NYSE: CBG) first vice president, said The Irvine Co. should continue to lead the way on rates in those markets it dominates.

“While one could argue that The Irvine Co. has trailed the (UTC) market the last two years, they have raised asking rents four times in their multi-tenant portfolio over the last 19 months,” Hoeck said.

The UTC submarket may be strong enough for The Irvine Co. to consider a speculative development, but this seems far from downtown San Diego, with its high vacancy rate of approximately 2 million square feet.

“Downtown has always been a tricky market,” Chaing said.

Studley report noted the city is expected to vacate its 140,000 square feet at 600 B St. and move to about 77,000 square feet in the 525 B St. building in downtown San Diego as of Sept. 1, 2014.

Studley said the city has another 550,000 square feet of leases coming due within the next two years, including more space at 600 B, as well as leases at 1200 Third Ave. and 1010 Second Ave.

Assuming that Sempra Energy (NYSE: SRE) moves into a new building at Seventh Street and Island Avenue within the next couple of years, The Ash Street building owner Sandor Shapery will have the challenge of filling the 340,000-square-foot existing building.

So far, Shapery said he has received no indication from Sempra as to whether the utility will move or not, but expressed confidence he would be able to backfill the building -- good news for a submarket with plus or minus 2 million square feet of space.

Cassidy Turley reported the majority of second quarter absorption occurred in Sorrento Mesa, University Town Center (UTC), Campus Point and Mission Valley.

Significant transactions included the occupancy of a new 248,888-square-foot build-to-suit for the FBI in Sorrento Mesa,Celgene Inc.’s move into 192,832 square feet in Campus Point, Illumina’s occupancy of a new 123,429-square-foot build-to-suit in UTC, and Liberty Mutual’s occupancy of 52,252 square feet in Mission Valley.

CT said the second quarter's largest move-outs took place in Kearny Mesa, where Bridgepoint Education vacated 80,000 square feet; in Eastgate, where Celgene vacated 78,470 square feet as part of its relocation and expansion to Campus Point; and in Carlsbad where the California Department of Fish & Wildlife and Army Corps of Engineers vacated 50,000 square feet.

CT noted the pre-leased projects include the 69,836-square-foot office building being developed by TIAA-CREF for Latham Watkins, at 12670 High Bluff Dr. in Del Mar; the 415,000-square-foot building being developed by Hines and JP Morgan(NYSE: JPM) for LPL Financial (Nasdaq: LPLA), at 4707 Executive Dr. in UTC; and the 68,426-square-foot building being developed by Alexandria Real Estate Equities (NYSE: ARE) for Genomatica, at 4757 Nexus Center Dr. in Eastgate.

In Sorrento Mesa CBRE noted that Qualcomm Inc. (Nasdaq: QCOM) is currently in active lease negotiations for nearly 250,000 square feet of expansion space, has 650,000 square feet under construction and announced a new campus requirement for as much as 1 million square feet.

Kilroy Realty (NYSE: KRC) put four buildings on the market for sale as part of a larger portfolio offering including The Campus at Wateridge and the CareFusion Campus.

Mission Valley posted 302,980 square feet of gross leasing activity in the second quarter, the highest number the submarket has posted since the fourth quarter of 2000.

This activity brought 2013 year-to-date leasing activity to 537,107 square feet, more than any other submarket in San Diego.

Direct vacancy for the Mission Valley submarket dropped 250 basis points in the second quarter to 9.1 percent -- the first time direct vacancy has been in the single-digit range in nine years, CBRE added.