San Diego Slumps Despite Tech Strength

SAN DIEGO-This county’s office market has joined others in the country that are posting higher vacancies and lower absorption, in spite of a biotech sector and other strengths here that bode well for its long-term performance, according to reports from major brokerage agencies tracking the market. Quarterly and year-end surveys from Cushman & Wakefield, CB Richard Ellis and Studley all show the same general trends here, all citing the recession and related problems as reasons for the weaker performance of the office market.

Cushman & Wakefield shows notes that landlords are offering increased lease concessions in light of countywide direct vacancy of 14.1% that up from 11.8% at year-end 2007. Studley tracks the vacancy at 15.7% and CBRE pegs the rate at 17.8%, commenting that, “After two straight quarters in which the counties direct vacancy rate rose more than a full percentage point, the fourth quarter registered an increase from 17.1% at the end of the third quarter 2008 to 17.8% at the end of the year.”

Studley’s report points out that the tech sector, which it describes as “a critical component of the San Diego region’s economy,” has started to lose revenues and cut jobs. The report cites Midway Games, which recently announced that it would let go 180 employees, while firms such as Agilysys, Inc. have been cutting payrolls since the summer.

Among the trends Studley sees is that landlords “are more concerned than ever with securing cash flow and continue to increase the size of concession packages.” At the same time, the supply of sublet space continues to increase, rising by 61.2% from a year ago. The average discount in asking rents for sublet space is now 17.9% but varies widely from space to space, according to the report.

Despite these signs of a weakened market, Studley notes that the leasing market “is showing some tentative signs of improvement.” It cites the education and healthcare sectors as counter-cyclical industries that have sustained some growth. For example, Bridgepoint Education signed an 11-year deal for 250,000 square feet at Sunroad Centrum in the Kearny Mesa area, and healthcare firm Kaiser Permanente, the nation’s largest not-for-profit health plan, inked a deal for 31,108 square feet at 17140 Bernardo Center Dr.

The brokerage firms generally forecast more of the same for 2009. Cushman & Wakefield comments, “While the near-term 2009 outlook for the San Diego County office market is cautious, the long-term prognosis reflects opportunity.” It says that the region is well-positioned to recover quickly at the next economic upturn, thanks to a diverse tenant base and high quality of life.

CBRE forecasts that the San Diego office market is will remain slow, with vacancy rates likely increasing a couple percentage points, while averageasking lease rates will remain steady or decline as landlords compete for new tenants.

Studley cautions that, “The serious deterioration in the national economy could delay a regional recovery,” pointing out that, “Many industries that were holding up quite well earlier in 2008 were struggling as the year ended.”