SAN DIEGO—Cassidy Turley reports thatSan Diego County office tenants absorbed 650,000square feet during the third quarter with positive activityacross all classes – a trend not seen since the samequarter last year.

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The Cassidy Turley report shows thatyear-to-date total countywide office absorption of566,000 square feet countywide is downfrom 880,000 square feet, or 35%, from the first threequarters of 2013 – the direct result of 545,000 SF of class B spacereturned to market during the first half of this year.

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“While overall office absorption is down from last year due tothe influx of vacated class B space, class A net absorption totals651,000 square feet for its highest level since 2007,” saidBrett Ward, managing director. “With the exceptionof first quarter 2013, class A leasing has been positive for thepast 20 quarters during which tenants haveabsorbed 4.2 million square feet or an average of210,000 square feet per quarter. Consequently, countywide class Adirect vacancy has decreased 790 basis points (bps) from itspeak rate of 19.4% recorded more than five yearsago to 11.5% today.”

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Overall, class A vacancy across all CentralCounty submarkets was 10.2%, the lowest in San DiegoCounty and trailing South County at 13.4% vacantand North County, which has 15.2% vacancy. In someof the most popular Central County submarkets, class A supply isquite limited as evidenced by current single-digit vacancy rates of3.7% in UTC, 5.7% in Kearny Mesa and 7.8% inMission Valley.

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“As class A supply becomes more limited, overflow demand toClass B space will lower vacancy in that segment as well,” saidDuncan Dodd, senior vice president.“Flight-to-quality and renewals within the 5,000 to 30,000 squarefoot range will continue to be the main drivers of leasingactivity, accounting for 40% of total lease obligations set toexpire in 2015. Leases 5,000 square feet and less will account for23% of expirations in 2015.”

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Class B tenants absorbed 356,000 square feet during the thirdquarter of 2014, most of which is located in Central County. Thisactivity drove vacancy in this sector to 17.6%,down from 18.7% the prior quarter and 230 bpslower compared to the peak rate of 19.9% recordedmore than three years ago in second quarter 2011.

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The Cassidy Turley report shows that countywide office vacancyincluding sublease stands at 18% as of third quarter 2014, down 60bps from 18.6% the prior quarter. Direct vacancy for all classes,excluding sublease space, was 14.6% as of September 30, 2014, downfrom 15.5% in the second quarter and 340 bps lower than the peakvacancy rate of 18% recorded at the end of the recession.

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Notable tenant move-ins during the third quarter includedthe occupancy of 47,000 square feet by InterceptPharmaceuticals in Eastgate; the occupancy of 36,000square feet by Interpreta in TorreyPines; the occupancy of 27,000 square feet byBiotox Sciences in Sorrento Valley; the occupancyof 22,000 square feet by Altrium in UTC; and the occupancy of20,000 square feet by Art of Problem Solving in RanchoBernardo.

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The largest move-outs occurred in the Point Loma/SportsArena submarket, where BAE Systemsvacated 56,000 square feet; in Rancho Bernardo,where Astute Networks and Kodakvacated a combined 27,300 square feet; and in GovernorPark, where Kleinfelder vacated 25,600square feet.

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“Looking ahead, a number of large leases were signed in thethird quarter that will positively affect absorption in futurequarters,” said Bill Cavanagh, senior vicepresident. “In Rancho Bernardo, over 80,000 square feet will beoccupied by Cymer and RenovateAmerica. Moss Adams and theUniversity of California San Diego will occupy40,000 square feet in UTC, and in Sorrento Mesa,Spreadtrum Communications and DefenseWeb Technologies will alsooccupy about 40,000 square feet of vacant space. Additionally,there are 263,000 square feet in already inked leases that arestill yet to be accounted for in Eastgate absorption .”

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The Cassidy Turley office report shows there are seven projectstotaling 1.1 million square feet under construction countywide,40.3% of which is preleased. Two of the new projects, totaling341,000 square feet, are scheduled to deliverlater this year. Theremaining five projects, or 735,000 square feet, will finish in2015. The preleased projects include Sempra EnergyTower in Downtown San Diego and Bressi Ranch Lots10 and 11 in Carlsbad, both of which are 100% committed,and Spectrum Lab in Torrey Pines, which is 25.7%pre-leased.

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“While construction is on the upswing, many developers and theirlenders are still reluctant to take the risk without strongpre-leasing in place, but they are beginning to discuss timing,”said Cavanagh.

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The countywide average asking rent for all classes combined inthe third quarter 2014 was $2.40 per month per square foot fullservice, 13.7% below the peak rate recorded nearly seven years agoin first quarter of 2008 but 4.8% higher than a year ago. Class Arent has also increased 6.2% over the past year, and class B renthas increased 4.1%.

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“In 2015, all San Diego County employment sectors combined areforecasted to grow 2.3%, or 31,100 jobs, with the professional andbusiness services sectors expected to grow by 3.6% or 8,250 jobs,”Ward said. “This will positively affect demand for office space.Hiring in the office sector will move the San Diego vacancy closerto market equilibrium with overall vacancy rates between 10% and12%. San Diego has added 118,300 jobs since the end of the lastrecession in June 2009, which is 36,800 jobs more than the 81,500jobs lost during the last recession.”

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“Already, tenants in the market are looking for 4.2million square feet over the next 24 months countywide,”he said. “While not all of the current tenants in the market willtransact in the short-term, leasing activity is certainly poised tostrengthen further.”

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David Phillips

David Phillips is a Chicago-based freelance writer and consultant with more than 20 years experience in business and community news. He also has extensive reporting experience in the food manufacturing industry for national trade publications.