Common leasing incentives, such as free rent and generous tenant improvement allowances are diminishing, says Miller.

SAN DIEGO-Common leasing incentives, such as free rent and generous tenant improvement allowances are diminishing as the better class-A space are becoming scarce. So says Colliers International’s Ron Miller, senior director of tenant advisory services, in this exclusive Q&A with GlobeSt.com. “At this pace, with steady demand and rising rental rates, we will see San Diego’s first large class A speculative office building since La Jolla Commons Tower in 2008.”

GlobeSt.com: What are your predictions for the San Diego Class A office market for the balance of 2013?

Miller: San Diego’s key submarkets such as Carmel Valley, Sorrento Mesa, UTC, and Mission Valley will continue to see increases in effective rents. Already, the Irvine Co., which controls over 45% of the University Towne Centre office submarket has pushed class A effectiverental rates along the La Jolla Village Drive corridor towards the mid $3 per square foot per month range while Kilroy Realty, which controls over 33% of the Carmel Valley office inventory, is pushing class A effective rental rates towards the $4 per square foot per month range. Common leasing incentives, such as free rent and generous tenant improvement allowances are diminishing as the better class A space are becoming scarce. At this pace, with steady demand and rising rental rates, we will see San Diego’s first large class A speculative office building since La Jolla Commons Tower in 2008.

GlobeSt.com: Why are rental rates rising so quickly in class A office buildings?

Miller: There is a lack of class-A full floor opportunities in the highly popular submarkets in North City West (Carmel Valley, Sorrento Mesa, UTC) and Mission Valley. Even with the traditional “summer slow-down” multi-tenant class-A office demand remains on fire in most major San Diego submarkets including Downtown.  San Diego County’s office market posted a strong 540,000 square feet of positive net absorption (demand) in Q2, causing the overall vacancy to drop to 13.4%, while increasing year-to-date net absorption to 817,000 square feet.  Outside of the CBD there are few quality full floor class A multi-tenant options available.

GlobeSt.com: Will we see new speculative office development anytime soon?

Miller: Yes, Both the Irvine Co. and Kilroy Realty are expected to break ground sometime within late 2013/early 2014 on new class A office buildings in UTC and Sorrento Mesa, respectively, to keep up with the class A office demand. The Irvine Co. is expected to either break ground on their remaining single tenant building in Bridge Point or their multi-tenant office tower at La Jolla Centre III in early 2014. The monthly rental rates are expected to be in the low to mid $4 per square foot range for La Jolla Centre III. Kilroy is expected to break ground in late 2013/early 2014 for their Pacific Corporate Center project with monthly rental rates expected to be in the $3.85 per square foot range.  Both projects should be available for occupancy in late 2015/early 2016.

GlobeSt.com: Where are the opportunities for the office tenants who need to be in larger facilities sooner than 2016?

Miller: Large blocks of available office space are scarce in Carmel Valley, Sorrento Mesa and Mission Valley causing effective rents to rise and leasing concessions to shrink. Township 14, TIAA-CREF’s newly remodeled class-A project in Carmel Valley, will have 56,000 square feet available in Q2 2014 at rental rates in the low-mid $4.00 per square foot range. Latham & Watkins will move into the pre-leased 70,000-square-foot adjacent building in Q2 2014.  Existing class-A office effective rents are approaching the high $3 per square foot range elsewhere in Carmel Valley, low-mid $3 per square foot range in Sorrento Mesa and $2.60 range in Mission Valley.  

In UTC there are three distant office districts: The La Jolla Village Drive corridor (multi-tenant class A office towers), Eastgate Technology Park / Bridge Point (low-rise campus style office buildings), and Campus Point (corporate headquarter office campus catering to office and Life Sciences).

There is a shortage of full floor space along the La Jolla Village Drive corridor along with a limited supply of the multi-tenant class A office. The vacancy rate for the La Jolla Village corridor is below 7% which has caused Landlords to raise their effective rents more than 25% from last year. Contrary to the La Jolla Village Drive corridor, opportunities for larger office space users are plentiful in Eastgate Technology Center and Bridge Point where several large blocks of office space are available at a 40% discount to the class A rental rates along the La Jolla Village Drive corridor. In mid-2014, the Irvine Co. will have approximately 300,000 square feet of campus style space available at Bridge Point’s Phase I as Lockheed Martin will vacate 120,000 square feet, LPL will vacate 120,000 square feet and Rovi will vacate 50,000 square feet. Furthermore in Eastgate Technology Park, Arden Realty will have approximately 290,000 square feet available within their four building campus when LPL and Nuvasive vacate in 2014.  In Campus Point, MIG Office Properties has SAIC’s former 330,000square-foot office campus for lease.  

Additionally, Amylin Pharmaceuticals has approximately 280,000 square feet in three buildings available for sublease catering to corporate HQ or Life Science firms.

Other opportunities for large blocks of space can be found in Kearny Mesa, where over 400,000 square feet is available including: Cricket / Leap Wireless’ 200,000-square-foot class-A building for sublease, Raytheon’s 92,000-square-foot class-A building for sublease, and two class-B buildings (formerly occupied by FBI) totaling 110,000 square feet.