The outlook from the San Diego office of Cushman & Wakefield is that 2008 "will be a relatively flat year for the local office market, with continuing slower net absorption and higher vacancy." According to the latest quarterly report from CB Richard Ellis, the flattening was already under way during the second half of 2007. Commenting in the company's quarterly report, CBRE senior vice president Jeb Bakke says, "The 2007 office market started off on fire and cooled through the last two quarters." The transition that is taking place in 2008 continues a "transition from the hot, capital driven investment market we started with in the beginning of (2007), ending with uncertainty in the economy and the capital markets in crisis," Bakke says in the report.

Lower demand for office space, rising vacancy and a softening in the all-time high rental rates of 2006 and early 2007 are the trends now, according to Steve Rosetta, executive director with Cushman & Wakefield. However, he adds, "San Diego's historically strong and diverse economy that is grounded in growth areas such as biotechnology, defense, entertainment and tourism, should minimize impact from other slowing industry sectors."

This transition year of 2008 follows "an incredible run since 1995" in the San Diego office market, according to Cushman & Wakefield. Since 1998, 416 new office buildings totaling 24 million sf have been added to the market.

The CBRE report cites a study by Economy.com that points out that the San Diego economy has slowed considerably as the housing market has weakened over the past year. "There has been some improvement in recent months, but the jobless rate continues to rise and industrial production growth is lackluster, so it is too soon to say that a corner has been turned, the Economy.com report says. The near-term outlook for San Diego is "muted," it says, but the long-term outlook remains good. "By the end of the decade, San Diego is expected to once again outperform the national average,l" Economy.com forecasts.

Mark Wayne, senior director with Cushman & Wakefield, notes that rental rates set new records in San Diego in 2007, topping $4 per square foot in premier markets like Del Mar Heights and UTC, and $2.38 per square foot average gross asking rates countywide. The Cushman & Wakefield 2008 report shows that in addition to 3.4 million sf of new space that came on line last year, corporate belt-tightening has created a 2.5-million-sf sublease inventory. "While the San Diego office market is not significantly overbuilt, new inventory is taking longer to absorb. Today, net absorption is at a 12-year low and vacancy is at a 12-year high," the report says.

Net absorption in 2007 of 712,007 sf was down 61% from 2006 and the county's lowest level of activity since 1995, according to Cushman & Wakefield. The company's research shows vacancy of 13.6% percent on total inventory, including owner-user space. Cushman & Wakefield anticipates that positive gross absorption will fall short of the additional sublease space and 2 million sf in new inventory expected to become available in the near-term. This will push vacancy rates above current levels. In addition, the all-time high average countywide asking rental rates of $2.38 per sf are beginning to soften as national and local businesses react to economic news, the company points out. "Landlords who paid record prices for assets in recent years are adjusting their leasing strategies as rental rates are not at the levels they expected," its report says.

CBRE pegs the San Diego vacancy rate at a figure close to that of Cushman & Wakefield, 14%, and Bakke believes that although capital markets issues will require an additional six to eight months to work out, the decrease in investment and leasing activity will not drop as low as in previous real estate cycles. "San Diego has a much more diversified economy than in past decades," Bakke says. "Office real estate fundamentals remain strong and many of the county's prime employment industries such as biotech, software, technology and defense won't be drastically affected by uncertainty in the real estate market."