SAN DIEGO-The county’s office, industrial and R&D markets all reported steady increases in net absorption during the second quarter–signs that the recent slow down in leasing may be nearing an end, according to a study by Burnham Real Estate Services.

“We predicted that the office, industrial and R&D markets would see a pickup in leasing activity during the second half of 2002,” says Mike Philbin, Burnham Real Estate’s managing director of transaction services. “It appears that we are on track to equal the absorption levels that occurred at the start of the 1996 real estate recovery.”

Vacancy rates are beginning to decline, albeit slightly, showing that the drop in new construction is beginning to affect supply once again, particularly in the mid-county submarkets, according to Philbin. Lease rates should rise accordingly, he adds.

Unlike 1996, “we simply will not have the land available to support the record levels of new construction we saw between 1996 and 2000,” he says.

The 42.3 million sf of new space built between 1996 and 2001 were demand-driven and most submarkets were not overbuilt when leasing activity began to slow,” Philbin says. Even though countywide vacancy rates have increased over their record-low levels in 1998-2000, they have stayed in the very low teens for office and under 10% for industrial.

The Burnham Real Estate Services report shows that following a slow first quarter, the San Diego County office market rebounded during the second quarter with 680,110 sf of net absorption. Year-to-date activity of 962,970 sf is just 80,000 sf behind all of 2001.

Nearly 60% of the net office absorption is coming from San Diego’s growing biotech community centered in Torrey Pines, University Town Center and Sorrento Mesa, according to Patrick Rohan, a senior vice president and office market specialist with Burnham.

The amount of office sublease space available in San Diego County decreased from 1.9 million sf at year-end 2001, to 1.7 million sf as of June 30, 2002. Of this, 1.27 million sf is actually vacant and more absorption is slated for the third quarter. Some submarkets, including Sorrento Mesa and Del Mar Heights, are seeing slight increases.

The countywide office vacancy declined slightly during the second quarter from 12.3% to 12.2%. New office construction is winding down, with 1 million sf completed year-to-date. “There are only nine new office projects totaling 1.33 million sf in planning, most of which will not start construction until 2003,” says Rohan.

The San Diego County industrial and R&D markets also showed notable improvement during the second three months of the year. The industrial sector absorbed 605,720 sf during the second quarter, bringing the first half’s total to 981,710 sf.

If the pace of the second quarter continues throughout the rest of the year, the market could absorb 1.6 million sf for the year, the same amount for all of last year, says Burnham Real Estate Senior Vice President Jed Stirnkorb.

Industrial vacancy is 8.4% and expected to fall to as low as 5.9% by year-end. “Industrial net absorption will not reach prior record levels simply because there is not enough supply to support that level of activity,” Stirnkorb says. “Availability will be severely limited for the foreseeable future.”

The San Diego County R&D market showed the greatest improvement in vacancy, falling from 12.1% to 10.8%. Second quarter net absorption of 452,545 sf contributed to the decline, as did the fact that there was just 134,400 sf added to the market.

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