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

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The 2Q office report, which covers the six months ending June30, shows the countywide office vacancy rate up nearly onepercentage point from 11.8% at year-end 2007, and a coincidingdecline in asking rates, which stand at $2.69 per sf per monthcompared with $2.73 per sf per month six months ago, whil askingClass A office rental rates of $3.09 per sf per month are down from$3.18 per square foot over the same period.

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

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

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San Diego's office market has also been impacted by the downturnin the housing market and related industries, and there's thephsycological affect that slipping home prices may be having on thedecision makers of the business world, Northbrook says, adding, "Ithink there's indirect consequences from that."

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The report forecasts that direct vacancy will average in thedouble digits for most of the county's major office submarkets astenant activity continues to perform below of recent years, but thesofter rental rates and attractive incentives are will continue tocreate new opportunities for tenants that were previously pricedout of certain office submarkets."Most people seem to feel like thedownturn in office is going to continue to 2009, and it may get alittle bit more challenging before it gets better," Northbrooksays.

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