"It's certainly challenging right now," says Eric A. Northbrook, executive directorfor Cushman & Wakefield. "It's challenging for owners, and from a landlord's perspective, there's obviously more supply than there is demand."

The 2Q office report, which covers the six months ending June 30, shows the countywide office vacancy rate up nearly one percentage point from 11.8% at year-end 2007, and a coinciding decline in asking rates, which stand at $2.69 per sf per month compared with $2.73 per sf per month six months ago, whil asking Class A office rental rates of $3.09 per sf per month are down from $3.18 per square foot over the same period.

"In corporate America, they're not making lateral moves," Northbrook says. "I think for the most part, you're seeing a lot of renewals and in some cases shorter term renewals."The recent completion of 639,000 sf of new office space and negative absorption of 102,000 sf during the same period is also contributing to higher vacancy, according to the report.

Recent office completions include the 273,763-sf Sunroad Centrum tower in Kearny Mesa and the 110,000-sf- Bernardo Terrace in Rancho Bernardo, with another 2.6 million sf of new office space is in various stages of construction, including a 450,000-sf headquarters tower for Sony in Rancho Bernardo, the report states.

San Diego's office market has also been impacted by the downturn in the housing market and related industries, and there's the phsycological affect that slipping home prices may be having on the decision makers of the business world, Northbrook says, adding, "I think there's indirect consequences from that."

The report forecasts that direct vacancy will average in the double digits for most of the county's major office submarkets as tenant activity continues to perform below of recent years, but the softer rental rates and attractive incentives are will continue to create new opportunities for tenants that were previously priced out of certain office submarkets."Most people seem to feel like the downturn in office is going to continue to 2009, and it may get a little bit more challenging before it gets better," Northbrook says.

Instant Insights /

San Diego Sees Higher Office Vacancy, Softer Rents

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