SAN DIEGO-San Diego is experiencing positive economic signs driving optimism about its economy. The region's index of leading economic indicators jumped nearly a full point in March, says a recent report from Cresa San Diego. “With the unemployment rate down to 8%, the hope is that employment will continue to increase throughout the balance of the year.”

The biotech, tourism, healthcare, and government defense industries continue to support the San Diego economy, says the firm. In the commercial real estate sector, new construction has been tied to prelease or build-to-suit agreements.

But the market is not healthy enough to promote speculative development, warns Cresa. “Developers have focused on bringing the concept of live, work, and play to downtown San Diego. Although an appealing concept, the vision will need preleasing commitments by some large tenants before any development will move forward.” 

Tenant's Perspective 

Vacancy in commercial real estate has fallen and will continue to drop over time, says the firm. “In some specialties and submarkets the vacancy is approaching single digits. With no considerable speculative development occurring, it takes little tenant expansion to lower the vacancy rate.”

So has it become a landlord's market? Not quite, says Cresa. “Few tenants are in the market for substantially more space and vacancies are still sitting dark for 18 or more months. Tenants still rule in regard to terms and conditions on renewals or relocations.”

Landlords that have purchased their real estate holdings in San Diego over the past 12 months are bullish on the long term values, says the firm. “Thus they are willing to provide substantial tenant improvement funding to secure a new tenant but the rental rate will reflect the landlord's investment. However, tenants can achieve favorable rental rates if they lease the facilities at or near an 'as-is' basis.”

Market Trends 

*Office vacancy rates dropped by 3%; this is the fourth straight quarter of at least a 3% drop.

*While San Diego's office vacancy rate dropped to 12.3% overall, the vacancy in Downtown (16%) and Del Mar Heights (16.7%) still remain high in comparison to UTC (11.6%), Mission Valley (12.5%), and La Jolla (11.6%).

*Of the 333,248 square feet of office space absorbed in San Diego, the majority was class "B" product, with 233,761 square feet of net absorption.

*San Diego's industrial specialty remained relatively unchanged in the first quarter of 2013 with only 100,850 square feet of net absorption. However, flex properties led the way with 140,867 square feet of positive absorption, while warehouse properties lagged with negative 40,017 square feet of absorption.

Check back with GlobeSt.com for an update to this story on where San Diego falls in the “War for Talent.”