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SAN DIEGO-Despite San Diego County office product performing below average and vacancy rates increasing 2.4% from December 2006, the large amount of capital that has entered the market as of late has led to new developments, higher rental rates and all-time-high purchase prices. According to CB Richard Ellis’ most recent San Diego office market report, most of the sector’s tenant and buyer demand is directed at well-located and designed class A properties.

Two of the largest deals to hit this office market are the $200-million sale of the 438,960-sf Pacific Center in Mission Valley by Maguire Properties and the $200-million acquisition by Wereldhave USA of the 23-story, 380,000-sf Advanced Equities Plaza in Downtown San Diego. The Equities Plaza acquisition is the first property investment that Wereldhave has engaged in on the West Coast. The firm decided to enter the West Coast market because of the area’s increasing economic activity. San Diego provided a viable option because the size of Equities Plaza will allow Wereldhave to build up a local management organization.

Wereldhave isn’t the only firm looking to establish or expand its presence in San Diego. According to the CBRE study, “San Diego employment growth will remain positive as moderate expansion is expected in overall employment as well as office employment.”

As regional employment expands, so has the need for customized office space. Raceway Corporate Center, a 130,000-sf office and R&D condominium project in Carlsbad, is one center offering tailored workspace to small business owners. The workspace, which could be as small as 1,135 sf or as large as 20,000-plus sf, is unique in the Carlsbad submarket, which does not provide many opportunities for such a diverse range of space within one business park. Construction begins in fall 2007 and will include six one-story buildings and one building with a second-floor mezzanine. Raceway Corporate Center will be located within the 1.5-million-sf, master-planned Carlsbad Raceway Business Park, an office and R&D park that is set to add more than 5,000 jobs to the community.

As the San Diego employment and office markets gain ground, it has spurred other local activity. The positive employment growth has led to such deals as the $3-million acquisition of a 1.68-acre parcel in Escondido by Voit, who plans to develop a 105-room Marriott Springhill Suites Hotel that would accommodate local-area business travelers.

ING Clarion Partners is also adding to its San Diego investment portfolio, picking up a third class A industrial building in the Siempre Viva Business Park for $24.9 million. The acquisition of the third (225,763-sf) building brings ING’s total investment in Siempre Viva to around $66.5 million.

For the next two years, the CBRE study expects total employment in San Diego to grow 2% per year. Office employment is expected to increase by 8,000 jobs in 2007, increasing 2.8%. “Vacancy rates are expected to inch up in many [San Diego] submarkets while average asking lease rates will likely level off during the year,” the study predicts. “Additionally, the investment market is expected to remain strong as buyers continue to look for quality San Diego properties to add to their portfolios.”

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