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SAN DIEGO-With tenant activity weak and companies continuing to downsize, the San Diego County office market saw vacancies rise and rents fall in Q1. Reports from both Grubb & Ellis, Cushman & Wakefield and CB Richard Ellis all predict the market will continue to soften through the remainder of the year and well into 2010, possibly even longer.

Both Cushman & Wakefield and Grubb & Ellis show negative absorption between 315,000 square feet and 320,000 square feet for the quarter. According to the former, office vacancies stand at 15.3%, up from 12.3% a year ago, while direct asking rental rates average $2.55 a square foot, down from $2.73 a square foot in March 2008. The latter pegs vacancies even higher at 16.8% but also has rents higher at $2.65 a square foot. CBRE puts availabilities, which include sublease space and space scheduled to come vacant as well as currently vacant space, at 18.7%. The brokerage predicts availabilities will continue climbing for 18 months, peaking at 24.5% in mid 2011.

Grubb & Ellis researchers point out that some submarkets are holding up better than others. While Central County accounted for the majority of negative absorption, returning 349,483 square feet to the market, South County actually showed positive absorption of 49,920 square feet. Several small submarkets have notably low vacancy rates, led by the 470,225-square-foot Highway 56 Corridor with 0%. The largest of the strong-performing submarkets is the one-million-square-foot La Jolla area, with a 7.4% vacancy rate. At the other extreme, Rancho Bernardo, with four million square feet, shows vacancies above 35%, while National City, with less than 500,000 square feet, is more than 50% vacant. Downtown San Diego is 15.4% vacant.

According to Grubb & Ellis, tenants are taking advantage of the soft market to move to higher quality office space at a reduced cost with more favorable terms. The brokerage says the trend has particularly benefited LEED-certified buildings such as La Jolla Commons in UTC and Terraces at Copley Point in Kearny Mesa, which are gaining popularity among well-positioned tenants.

C&W broker Brunson Howard concurs. “Tenants continue to take advantage of moving allowances and considerable leasing incentives being offered through unconventional deal structures,” he says. “This includes rent abatement or very aggressive start rates that escalate in larger fixed increments over an annualized basis.”

C&W projects that leasing activity will remain under the levels of the past 10 years as companies continue to feel the effects of the national recession. It says effective rents rates will continue to decline until employment growth resumes and confidence in the general economy strengthens.

“All industry sectors are focused on reducing expenses and as a result we are seeing firms opting to sublease unwanted space or restructure existing leases in an effort to downsize and leverage rapidly declining rental rates,” says Howard.

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