County Office Market Shows Signs of Recovery

The San Diego County office market is seeing signs of recovery, according to reports by Cushman & Wakefield and Jones Lang LaSalle in reports covering the first quarter of the year.

Cushman & Wakefield said activity is gradually picking up, particularly in conveniently located areas with well-positioned and desireable office product that is now available at highly competitive rates with generous concessions. Jones Lang LaSalle said some indicators point to the office market stabilizing in the county, increased tenant requirements — especially from large companies.

“The San Diego County office market has been treading water for quite some time now, but in select submarkets we are finally seeing movement,” said Eric A. Northbrook, executive director with Cushman & Wakefield. “This is coming from an increase in activity from companies who recognize that the current environment provides tremendous opportunity for quality space. As the overall economy begins to stabilize — reflected in recent stock market and employment gains — we expect to see even more improvement.”

According to the Cushman & Wakefield study, San Diego County recorded 291,140 square feet of direct positive net absorption for the first quarter of 2010, a significant shift from the same period in 2009 when negative 531,760 square feet of net absorption occurred. Gross leasing activity (representing all direct leases and subleases signed) during the first three months of the year was 1,595,164 square feet.

The I-15 Corridor remains the bright spot of the first quarter, with 334,963 square feet of positive net absorption as of March 31, 2010. The majority of this activity occurred in Rancho Bernardo where Nokia signed a 196,734-square-foot lease at The Summit at Rancho Bernardo. Additionally, MedImpact moved into its newly completed 150,000-square-foot build-to-suit campus in Scripps Ranch, and renewed a signification portion (32,775 square feet) of space at Scripps Corporate Plaza.

Other significant transactions in the first quarter include The County of San Diego, which signed a 45,847-square-foot lease at 450 B Street in downtown San Diego; Advanced BioHealing, which signed a 20,432-square-foot lease at 11095 Torreyana Rd. in Torrey Pines; and Lewis Brisbois Bisgaard & Smith, which signed a 29,940-square-foot lease at 701 B St. in downtown San Diego.

The Cushman & Wakefield report shows current countywide direct vacancy of 15.2 percent unchanged from 15.2 percent reported in the first quarter of 2009. Direct asking monthly rental rates are averaging $2.26 per square foot countywide, down from $2.55 per square foot as of March 31, 2009.

Jones Lang LaSalle said the inventory of empty office space will continue to exert downward pressure on asking rents and provide intense competition between owners for large and medium-sized credit tenants. “Moreover, it said, “concession packages such as lease buyouts, long-term free rent periods, increased tenant improvement packages, moving allowances and other enticements have been prevalent in the last few quarters and are forecasted to continue through the balance of this year.”

Jones Lang LaSalle said leasing activity in Downtown San Diego remained relatively quiet after last year’s 102,000-square-foot Procopio, Cory Hargreaves & Savith relocation and expansion. “However, the law firm of Lewis Brisbois, Bisgaard & Smith signed a lease for 29,000 square feet at 701 B St.,” according to the Jones Lang LaSalle report. The report also said that Bridgepoint Education leased 28,000 square feet at 600 B St. in the first quarter, expanding its considerable footprint into Downtown, and is in the market for additional space in the suburbs.

More than $1 billion in defense contracts have been awarded to San Diego-area companies in 2010, among them General Dynamics, Northrop Grumman and Cardinal Health, said Jones Lang LaSalle.