While there is a decent supply of lower-end, cheap, older office space, there is an acute shortage of newer, quality and creative office space in the East County market. If a tenant as small as 1,000 square feet was looking for a nice, professional-looking, newer space, it is very hard to find. As sizes get larger, the search will get much harder and for larger offices in excess of 5,000 square feet—forget about it. Even in the lower-quality properties, the larger stuff is just not there. This was all highlighted when I conducted a search for the East County Economic Development Council, which was looking to move its offices after its building owner took back the space for its own use. We went through everything, and there were zero options available that provided them with the quality they needed (which wasn't top end). With no options, they ended up moving in with another group that had some extra space. Afterward, the director said that this was a perfect illustration that there is a serious need for new office development—something they will encourage as part of their ongoing mission in East County.

Recently, we have completely leased up all of our professional space in the market. These deals include 2,400-square-foot and 4,000-square-foot medical offices in two Santee projects: a 2,000-square-foot fiduciary office in La Mesa and a 10,000-square-foot office in Santee. All of these deals represented the completion of lease-up in these properties. At one new Santee project, we double-clutched the plan in mid-construction and doubled the size of the office component due to the surprisingly high demand we were experiencing. We sold a 100%-occupied office and medical project in El Cajon at an aggressive cap-rate to an out-of-state exchange buyer. We had another 100%-occupied office property in Lakeside that we sold to an owner-user who will relocate one of the tenants for its own use. There were multiple buyers on that one who submitted offers, and we were in escrow two days after we put it on the market. If there were other leased buildings of above-average quality, they will also sell relatively quickly.

GlobeSt.com: What does this submarket have to offer tenants that other parts of San Diego do not?

Clark: Location and convenience, however not in the traditional sense. There are a lot of residents in East County who are tired of sitting in freeway traffic on the 8, 94 and 52 freeways each morning and afternoon. I have specialized in the East County market for 33 years now, and the situation is the same now as it was in the mid-1980s. I have had clients relocate their offices to East County because they live in the area. In all instances, they discovered that workers could be hired for less pay and are readily available because they want to avoid the lengthy commute west. And those who lived farther west experienced a reverse commute, so getting into East County each morning was a breeze for them, being against the traffic each way.

GlobeSt.com: What types of investors are interested in this market?

Clark: I just sold an office complex to an out-of-state investor looking for a 1031 exchange. They are relocating to La Jolla soon and wanted something in our county. Since the market is so tight in other areas, they expanded their search east and found our listing. There are more San Diego investors who are facing 1031 needs, and if they don't want to go out of state, East County is a good option. It's not as sexy as Torrey Pines, UTC or Downtown however there are some good-quality properties in East County; if the sellers decide to sell, which is another problem.

GlobeSt.com: What else should our readers know about the East County office market?

Clark: With the acute shortage of available space, the big news is that there is a huge opportunity to build and lease up new space. Medical, professional and process offices are all in demand, as I have heard from them all. Over the last couple of cycles, there was not a lot of new development, and the market is suffering from that. Most of the product has aged, and we are seeing that any new product is being absorbed quickly.

|

SAN DIEGO—While it's not a market that is sought out by most investors, East County presents some tremendous opportunities for office buyers, the Heritage Group's senior director Kyle Clark tells GlobeSt.com. Clark and Dan McCarthy, also a senior director at the firm, recently represented seller Cloyd 1999 Revocable Family Trust in the sale of a small office building in Lakeside, CA, an area of East County, to James Fread Agency Inc. Jamie Hopkins of Team Metro Real Estate represented the buyer.

We spoke with Clark about the office-investment market in East County and what it has to offer tenants that other San Diego submarkets don't.

GlobeSt.com: How would you characterize the office investment market in East County?

Clark: The investment market can be best described as “interesting.” I say interesting because it is not a market that is sought out by most investors; however, it is a market that presents some tremendous opportunities.

While there is a decent supply of lower-end, cheap, older office space, there is an acute shortage of newer, quality and creative office space in the East County market. If a tenant as small as 1,000 square feet was looking for a nice, professional-looking, newer space, it is very hard to find. As sizes get larger, the search will get much harder and for larger offices in excess of 5,000 square feet—forget about it. Even in the lower-quality properties, the larger stuff is just not there. This was all highlighted when I conducted a search for the East County Economic Development Council, which was looking to move its offices after its building owner took back the space for its own use. We went through everything, and there were zero options available that provided them with the quality they needed (which wasn't top end). With no options, they ended up moving in with another group that had some extra space. Afterward, the director said that this was a perfect illustration that there is a serious need for new office development—something they will encourage as part of their ongoing mission in East County.

Recently, we have completely leased up all of our professional space in the market. These deals include 2,400-square-foot and 4,000-square-foot medical offices in two Santee projects: a 2,000-square-foot fiduciary office in La Mesa and a 10,000-square-foot office in Santee. All of these deals represented the completion of lease-up in these properties. At one new Santee project, we double-clutched the plan in mid-construction and doubled the size of the office component due to the surprisingly high demand we were experiencing. We sold a 100%-occupied office and medical project in El Cajon at an aggressive cap-rate to an out-of-state exchange buyer. We had another 100%-occupied office property in Lakeside that we sold to an owner-user who will relocate one of the tenants for its own use. There were multiple buyers on that one who submitted offers, and we were in escrow two days after we put it on the market. If there were other leased buildings of above-average quality, they will also sell relatively quickly.

GlobeSt.com: What does this submarket have to offer tenants that other parts of San Diego do not?

Clark: Location and convenience, however not in the traditional sense. There are a lot of residents in East County who are tired of sitting in freeway traffic on the 8, 94 and 52 freeways each morning and afternoon. I have specialized in the East County market for 33 years now, and the situation is the same now as it was in the mid-1980s. I have had clients relocate their offices to East County because they live in the area. In all instances, they discovered that workers could be hired for less pay and are readily available because they want to avoid the lengthy commute west. And those who lived farther west experienced a reverse commute, so getting into East County each morning was a breeze for them, being against the traffic each way.

GlobeSt.com: What types of investors are interested in this market?

Clark: I just sold an office complex to an out-of-state investor looking for a 1031 exchange. They are relocating to La Jolla soon and wanted something in our county. Since the market is so tight in other areas, they expanded their search east and found our listing. There are more San Diego investors who are facing 1031 needs, and if they don't want to go out of state, East County is a good option. It's not as sexy as Torrey Pines, UTC or Downtown however there are some good-quality properties in East County; if the sellers decide to sell, which is another problem.

GlobeSt.com: What else should our readers know about the East County office market?

Clark: With the acute shortage of available space, the big news is that there is a huge opportunity to build and lease up new space. Medical, professional and process offices are all in demand, as I have heard from them all. Over the last couple of cycles, there was not a lot of new development, and the market is suffering from that. Most of the product has aged, and we are seeing that any new product is being absorbed quickly.