Office Market Set for 2M SF of Net Absorption in 2004

SAN DIEGO-The San Diego County office market may be headed for its best year since 2000, according to new research released by Burnham Real Estate. The report predicts that at least 2 million sf of office space will be absorbed here by year-end.In the first quarter of 2004 alone, nearly 420,000 sf of net absorption has occurred in the region’s office market, with an additional 300,000 sf worth of lease transactions closing. Build-to-suit commitments are also occurring at a rapid pace, accounting for nearly 70% of the 960,000 sf of new space slated for completion in 2004. “Overall leasing activity during the first three months of the year – including renewals and expansions- is up 15% to 20% over the same period in 2003,” according to Burnham’s researchers.A number of factors are driving this rebound, including an uptick in employment, the return of biotech, and a dearth of available land. “The economy is obviously improving, although San Diego has always had a steady base of jobs here,” Ron Miller, a Burnham senior vice president, tells GlobeSt.com. San Diego County’s job base is indeed growing stronger, as a total of 16,600 jobs were created here between February and March, according to Burnham’s research. The seeming return of the biotech industry is also helping to fuel the office market, with Neurocrine Sciences currently building a 300,000-sf office and laboratory campus here; Biogen/Idec committing to two new campuses last year (one of which is presently underway); and Biosite now under construction on a new corporate headquarters that will eventually total 800,000 sf. “Biotech had been pretty soft until recently, but now the economy and the IPO markets are improving,” Miller says. And as companies begin investing in biotech again, these firms will begin to “gobble up” the space that has sat vacant over the past several years, he adds.In addition to job growth and the revival of the biotech industry, Miller feels that the region’s land shortage is having a particularly significant affect on the office market, as it is limiting the amount of new office product that can be built here. “The lack of future availability of office projects is pushing up the demand for tenants to lock in both expansion space and new space,” Miller says, adding that overall office vacancy is expected to drop to less than 10% by the end of 2004. “At some point, rates will start to escalate and probably pretty fast, so a lot of tenants are starting to recognize that they better look out further in advance before their lease expires and try to lock in their expansions early,” he explains. Lack of land is one characteristic that is contributing to the current strength of one of San Diego County’s hottest office submarkets, Mission Valley. In Miller’s opinion, this area is the strongest office submarket in the region. “It is located in central San Diego County and there is very little land left,” Miller says. “Frankly, the last remaining parcels of land are being developed right now because the vacancy rate is so low,” he points out, adding that “no landlord involved with spec development in Mission Valley has really been hurt in the past.” In addition, “it has a good mix of class A, B and C office buildings, which gives firms different price targets to work with,” Miller notes.