Office Market Picks Up

SAN DIEGO, CA-Activity in the local office market is starting to pick up again, according to recent research published by the Marcus & Millichap brokerage firm. The report, which examines third quarter statistics, points to a decline in vacancy, rise in rental rates and sales prices, and an increase in venture capital.Vacancy levels in the San Diego office market are poised to decline 50 basis points this year, to 11.9%, according to Marcus & Millichap’s researchers. They attribute the drop in vacancy to the expansion of businesses that is occurring once again in the metro area. This phenomenon has been partially brought on by the diversity of the local economy, which is accelerating this year, according to the Marcus & Millichap research. The report cites the addition of 29,000 jobs by year-end, pointing out that “office-using employment posted a gain of 10,000 positions in 2003 and is on track to add another 9,000 jobs this year.” In addition, the “improving national economy is encouraging venture capitalists to come out of hibernation and local firms have seen an increased flow of funds,” say Marcus & Millichap’s researchers. They explain that venture investment capital was $284 million in early 2004, which reflects a 98% increase from the first quarter of 2003.As local businesses grow and vacancy continues to drop, office rental rates have started to rise. Marcus & Millichap’s researchers say effective rents are expected to increase by 4% this year, “due to improving market conditions.” The report states that asking rents fluctuated between $2.09 per sf and $2.12 per sf over the course of 2002 and 2003. During this time, “owners were reluctant to lower asking rents, but were forced instead to offer concessions to lure tenants,” according to Marcus & Millichap’s researchers. “However, increased leasing activity has allowed both asking and effective rents to start rising again, and both are already up by 2% this year,” the researchers say.On the sales side, the median sales price for all local office assets has risen 12% since 2003, to $170 per sf. The Marcus & Millichap report states that “investors have been aggressive, as evidenced by a 20 basis point decrease in the average cap rate, to 8%.” Many of the properties that are trading hands are multi-tenant, low-rise office buildings, which are mainly purchased by private investors. However, “institutional investors have also been active in the market and are paying a premium for well-located buildings,” according to Marcus & Millichap’s researchers.