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SAN DIEGO-Downsizings, short-term renewals and relocations to more cost-effective space dominated the San Diego industrial market during the first half of the year, according to a new report on the county’s industrial inventory by Cushman & Wakefield. Vacancies rose, absorption fell and rents declined as the market generally weakened during the first half as the recession continues to take its toll on the county’s industrial market, according to reports by both Cushman & Wakefield and CB Richard Ellis.

Both of the real estate services firms peg the negative net absorption in the neighborhood of two million square feet for the first half of the year. Cushman & Wakefield, which tracks an inventory of nearly 189 million square feet in the county, pegs the negative net at 2.4 million square feet. CBRE, which tracks an industrial inventory of nearly 192 million square feet, figures the negative net at two million square feet at mid-year, approximately1.3 million square feet of which occurred during the second quarter.

According to Mickey Morera, senior director with Cushman & Wakefield’s San Diego office, “Large give-backs by Accredited Home Lenders, Pentair, ResMed, and Chase, as well as returned space from expiring short-term leases and renewals, were responsible” for much of the negative net absorption. Looking forward, Morera says that tenants will continue to search the market for value, looking to cut costs by reducing their square footage or renegotiating their existing leases. “Short-term deals will continue until confidence in the economy is restored and job growth improves,” he says.

Morera adds that, “Landlords will be challenged over the next 18 months as tenants continue to expect low rates and generous incentives. Some tenants are genuinely struggling and landlords will face some loss of income through continued downsizings, requests for rent relief, and in some cases, business failures.”

CBRE, in its report, cites a recent forecast by Torto Wheaton Research projecting that in the short term the number of manufacturing and distribution workers will decline and net absorption will continue to lag supply. The recovery period will likely begin at either the end of 2010 or early 2011, with industrial employment and net absorption levels returning to a positive trend, the forecast says.

Cushman & Wakefield lists the direct vacancy in the county’s industrial market at 9.1%, up from 7.3% at year-end 2008. CBRE describes “a direct-vacancy rate spike from 7.8% at the beginning of the year to 9% at mid-year.

Average asking rates for the county’s industrial space run higher than those in most markets because of the large proportion of R&D space. CBRE’s report gives the weighted average asking lease rate for all industrial space at 97 cents per square foot per month, triple net, a drop of five cents during the quarter, and notes that “This was the fifth straight quarterly decline in asking rates since the rate was $1.16 at the end of the first quarter 2008.” Cushman & Wakefield lists the average direct asking rental rates at 95 cents, compared with $1.07 at year-end 2008.

Both companies cite slowing construction, with Cushman & Wakefield report showing just 200,097 square feet under way, in build-to-suit projects in Vista, compared with the eight million square feet completed over the past few years. CBRE observes that, “The second quarter ended with no new industrial projects under construction as most of the active commercial developments are multi-tenant office, owner-user office or medical office.”

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