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SAN DIEGO, CA – Countywide industrial vacancy remained in the single-digit range despite economic woes thanks to R&D growth, the diverse San Diego economy and lower levels of construction activity, according to a report on the second quarter issued Friday by Cushman & Wakefield.

The report shows a direct countywide vacancy of 7.7% for the quarter, an indication of continuity in supply and demand balance, and it shows that despite year-to-date direct negative absorption of 286,000 sf, gross leasing activity totals 4.2-million sf. This, along with there being only 940,839 sf of space under construction countywide, should prevent vacancy from spiking, the report states.

Direct asking rental rates are down just slightly for industrial multi-tenant space to $1.08 psf per month with concessions now standard in submarkets with larger quantities of available space, according to the report.

In 2009, Cushman & Wakefield anticipates fewer construction starts will occur as developers wait for demand to improve. Vacancy rates will rise slightly as inventory takes longer to absorb but will stay below 9% overall in the county.

“In San Diego we’ve seen some of the stronger industry sectors sort of picking up and taking down space,” says Tucker Hohenstein, senior director with Cushman & Wakefield. “Because San Diego has broad-based economic employment, medical manufacturing, and telecommunications, and some of the other business sectors are continuing to expand and take down space. Medical and life sciences are big drivers of space in the San Diego market.”

He adds that in San Diego “R&D is saving the day,” and “in industrial, over the last 10 years we’ve seen a strong transition from light-industrial to a life sciences and medical sciences R&D flex users.”

Some of the local entrepreneurial companies continue to expand and take space, Hohenstein says, adding, “San Diego is very well-known for some of the smaller startup firms.” UCSD’s science programs graduate several PhDs each year with start-up aspirations bent on staying in the San Diego area, Hohenstein adds.

The largest lease of the second quarter was the Paradigm Group, which signed a five-year, $4.5 million lease for 124,000 sf in the Siempre Viva Business Park in Otay Mesa.The emergence of short-term lease commitments as an alternative strategy for landlords to generate cash flow and offset operating expenses has helped to offset downsizing and lower demand for space, the report states.

In Downtown San Diego, buildings owned and previously occupied by Jerome’s Furniture are also being leased on a month-to-month basis. These buildings will eventually be sold for residential redevelopment since downtown land prices are now too high to support industrial use.

Over-building has left a few spots, like the Oceanside and Carlsbad markets in the north and to the south the Otay Mesa market, the weakest of the San Diego area markets, according to the report. “Those areas had a lot of new development and were also some of the hardest hit by the residential slowdown,” he says.

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