S.D. Commercial Real Estate Markets Expected to Improve in '11

While many San Diego County office and industrial buildings are begging for tenants and retail landlords are having to refill spaces once thought good for life, there are some optimistic notes for 2011.

Retail

The fundamentals are improving, said Bruce Schiff, a Colliers International broker who put a Badass Coffee in an old bank space earlier in the year and most recently landed a Discount Tire in a former Hollywood Video space both in the same Rancho Penasquitos center.

"We're seeing a lot more activity out there," Schiff said.

Bill Thaxton, a Flocke & Avoyer senior vice president, also likes what he has seen.

"Retail sales are up and fewer tenants are closing stores," he said.

Thaxton said a lot will depend on the holiday sales figures, which have already been reported to be stronger than they had been for the past two years.

Although Thaxton hasn't seen many stores open lately, he expects that will soon change for competitive reasons "and to keep stockholders happy."

When asked if online shopping could make brick and mortar stores obsolete, Thaxton said certain items such as clothing are often better obtained in a store than online.

Out of necessity, neighborhood grocery stores have generally continued to fare better than other retailers and Thaxton said even specialty grocery stores seemed to have held their own.

But by any measure, it has been a rough couple of years.

Hollywood Video, Mervyn's, Circuit City and Linens 'N Things are gone, and Blockbuster Video is in Chapter 11 bankruptcy, but Kohl's, Sprouts, Best Buy and others have filled the voids.

For the most part, retailers are small with leasing transactions generally worth less than $1 million.

One larger recent transaction was La Jolla, LLC's (dba Eddie V's Edgewater Grill) having paid $4.74 million for a 9,415-square-foot restaurant space for 10 years at 1270 Prospect St. in La Jolla.

Office

San Diego County's office market continues to try and recover from the worst recession since the great depression.

While the Rancho Bernardo market appears to have rebounded smartly with the filling of space for such businesses as Nokia and Northrop Grumman (NYSE: NOC), some other parts of the I-15 Corridor, Carlsbad and downtown San Diego have experienced more moving around than net leasing gains.

Still, Kraig Kristofferson -- CB Richard Ellis (NYSE: CBG) senior vice president -- said he feels optimistic about 2011.

"We're hopeful next year will bring some stronger demand. There are a few larger tenants looking around for space," Kristofferson said, without going into specifics.

He too conceded it hasn't always been easy to fill spaces.

"The west side of downtown is the stronger side of the market," Kristofferson said.

People may be feeling more optimistic, but both Kristofferson and his CBRE associate Louay Alsadek agreed it will be years before new speculative office construction may be considered.

"I don't see new construction happening until 2013," Alsadek said.

With new office construction years away, some prospective investors are looking hard at existing assets.

In downtown San Diego, San Francisco-based Divco West Properties is making a play for the 364,000-square-foot office portion of Emerald Plaza for a reported $99.7 million, or $274-per-square-foot.

The building at 525 B St. that is currently owned by Hines, the Texas development and investment firm, is also on the market and is reportedly receiving significant interest, as well.

The law firm of Procopio Cory Hargreaves & Savitch, LLP this year leased about 100,000 square feet in the 525 B building which has a LEED -- Leadership in Energy and Environmental Design -- Silver rating, last spring.

Industrial

Different surveys arrive at different numbers, but the county's industrial vacancy appears to have nearly doubled into the low double digits since 2007.

Nowhere is the vacancy more evident than on Otay Mesa.

The third quarter CoStar (Nasdaq: CSGP) report doesn't break out Otay Mesa, but said the overall industrial vacancy in the South Bay was 4.7 million square feet -- the vast majority of which is in the mesa.

By most accounts, at least 3.5 million square feet of this is see-through space on the mesa.

So how much of a problem will this present over the long term?

Linda Greenberg, a Colliers International senior vice president, said with very little industrial space in Chula Vista, companies will have few other choices.

"Users have to look at where the next market is going to be," Greenberg said. "When tenants or buyers are unable to find property that fits their requirements in Chula Vista, they will likely look to Otay Mesa."

Greenberg, who pegged the current fourth quarter vacancy at 7.3 percent in Chula Vista, said Otay presents tremendous opportunities for larger users.

"For users with large requirements, there are seven buildings in Otay Mesa over 100,000 square feet. These buildings total 1.2 million square feet," she said.

Greenberg said with the South Bay Expressway (state Route 125), and the expansion and extension of SR-905 allowing commerce to move much more easily, Otay Mesa becomes an increasingly more attraction option.

What's more, Greenberg said investors are watching.

"There's some significant acquisition money on the sidelines," Greenberg said. "As things improve, people will be riding that market."