On a trailing four-quarter basis, which is the sum of all leasing activity over the last four quarters, overall leasing totaled 4.7 million square feet, a slight increase as compared to the previous four quarters, according to the report, however it was a 16.2% decline as compared to one year ago.
"Class A deal volume was particularly anemic, reaching only 421,295 square feet, a quarterly decline of 36.5%," says Mike Labelle, senior vice president and co-branch manager of Studley's San Diego office. "The market has yet to see the pervasive flight-to-quality that generally kicks off a recovery and, with space still in ample supply, most tenants see little need to rush leasing decisions."
Studley's report echoes other reports from the area. According to Chris Wood, managing director of Voit Real Estate Services' San Diego region, "Buyers, sellers, landlords and tenants are all gaining confidence that there are good deals to be made right now" in San Diego. But Voit, for one, reported an increase in leasing and sales activity across all commercial property types, having completed more than 30 transactions encompassing upwards of 240,000 square feet for the month of February alone.
According to Studley, tenants continue to streamline operations. According to the report, for those tenants who have executed transactions, the focus continues to be on reducing operating costs and minimizing out-of-pocket expenditures. Many firms, whether relocating or restructuring an existing lease, are consolidating into more efficient layouts. "Additionally, companies are hedging their bets and opting for shorter-term leases, a strategy that aligns with many landlords' interests, who hope that the market rebounds in a couple of years," notes T.D. Rolf, a Studley vice president who co-manages the San Diego office.
However, according to the report, some tenants are taking advantage of the heavily discounted rents to expand—and, in some cases, sign longer-term deals—indicating that more companies are regaining their confidence in the economy.
The report points out that banks and investment firms in the San Diego region have made a strong comeback in the last several quarters, and have lately been responsible for some of the longer-term leases. For instance, UBS Financial Services signed a seven-year, 10,251-square-foot lease at 17140 Bernardo Center Dr. Also, accounting firm Grant Thornton LLP doubled its space, completing a 10-year, 10,544-square-foot lease at 12220 El Camino Real.
Law firms were also quite active, accounting for much of the first quarter's relocation activity, says the report. Lewis Brisbois Bisgaard & Smith LLP signed for 29,940 square feet in the Merrill Lynch Tower in Downtown San Diego. The firm will move from 550 Corporate Center in the next few months. Additionally, Latham & Watkins inked a 28,726-square-foot lease renewal at 12636 High Bluff Dr. However, the firm only extended its lease term by three years, in line with the overall market trend.
Studley notes that the overall rate for vacant available space in the San Diego region has remained flat for the last two quarters, and currently stands at 16.4%. The class A rate, 19%, was also stable. The I-15 Corridor posted the largest quarterly increase in the class A category, rising 3.4 percentage points to 24.6%. Overall asking rents inched up slightly to $2.27 per square foot while class A asking rents were basically unchanged at $2.68.
Studley's outlook? Much like other company reports, Studley sees San Diego's primary industry sectors—technology, life sciences, biotech, and education—as showing signs of improvement. "Still, given the significant supply of office space on hand and tepid tenant demand, we believe the market will continue to be extremely favorable for tenants through 2010," Labelle says.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
