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

|

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

|

This transition year of 2008 follows "an incredible run since1995" in the San Diego office market, according to Cushman &Wakefield. Since 1998, 416 new office buildings totaling 24 millionsf have been added to the market.

|

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

|

Mark Wayne, senior director with Cushman & Wakefield, notesthat rental rates set new records in San Diego in 2007, topping $4per 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 to3.4 million sf of new space that came on line last year, corporatebelt-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 isat a 12-year low and vacancy is at a 12-year high," the reportsays.

|

Net absorption in 2007 of 712,007 sf was down 61% from 2006 andthe county's lowest level of activity since 1995, according toCushman & Wakefield. The company's research shows vacancy of13.6% percent on total inventory, including owner-user space.Cushman & Wakefield anticipates that positive gross absorptionwill fall short of the additional sublease space and 2 million sfin new inventory expected to become available in the near-term.This will push vacancy rates above current levels. In addition, theall-time high average countywide asking rental rates of $2.38 persf are beginning to soften as national and local businesses reactto economic news, the company points out. "Landlords who paidrecord prices for assets in recent years are adjusting theirleasing strategies as rental rates are not at the levels theyexpected," its report says.

|

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

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.