San Diego County's office market deteriorated further in the third quarter – with even the region's most sought-after, expensive business district, Carmel Valley, showing signs of stress.
The overall vacancy rate in the county was 17.1 percent, according to a report yesterday from CB Richard Ellis. That's the highest rate since 1995. Last year at this time, office vacancy was 12 percent.
The availability rate, which includes space being marketed but still occupied for now or under construction, was 23.6 percent.
San Diego is doing worse than its neighbors – mostly because of rampant new construction locally over the past couple of years, brokers say.
In Greater Los Angeles, office vacancy was 10 percent, according to CB Richard Ellis. In Orange County, which has seen vacancies soar as New Century and other subprime lenders failed, it was 15.4 percent.
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Office vacancy
DIRECT VACANCY | TOTAL AVAILABLE
Downtown 3.8% 17.7%
Mission Valley 18.3% 24%
Kearny Mesa 17.2% 22.8%
Carmel Valley14.2% 23.8%
Sorrento Mesa 15.5% 18.4%
University City 18.1% 26.8%
Carlsbad 24.7% 30.1%
COUNTYWIDE 17.1% 23.6%
Numbers are for the third quarter. Direct vacancy refers to space that is empty today. Total available is space that is on the market for lease but is still occupied or under construction.
Source: CB Richard Ellis
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“Demand is soft,” said Brian Ffrench, senior vice president for Studley, a commercial brokerage that represents tenants. “We've had some new construction that's going to take time to absorb.
“When you have companies more interested in tightening up space than expanding, you're going to have these negative quarters and years,” Ffrench said.
Office demand is closely linked to job growth. The fallout from the housing downturn has put a clamp on the region's employment expansion. Unemployment in August was 6.4 percent, up from 4.8 percent a year ago.
National economic turmoil also has taken a toll. Tenants don't want to commit to leasing space.
“We're seeing more space coming on the market for sublease,” said Mark Wayne, a broker with Cushman & Wakefield. “Given the uncertainty in our local and national economy, companies are more apt to renew their leases and not incur moving costs. They're trying to deal with their own slowdown.”
“Net absorption” – a real estate term that calculates the amount of space leased minus the amount vacated – was a negative 154,000 square feet for the quarter, according to CB Richard Ellis. For the year, net absorption was off nearly 700,000 square feet.
Carmel Valley – a popular market for law firms and other high-end office users – posted the worst net absorption in the county. New leases trailed vacated space by 250,000 square feet.
NextWave Wireless, JMI Corp., Fair Isaac Corp. and Neurocrine Biosciences are among the companies that have shed offices. Vacancy has risen to 14.2 percent, up from 6.1 percent a year ago.
Brokers say law firms still want to be in Carmel Valley to be close to technology clients in Sorrento Mesa and Torrey Pines. But other tenants are moving.
Carmel Valley has the most expensive lease rates in the county. The average monthly asking rent is $3.53 per square foot, compared with $2.47 a foot countywide.
“Companies are increasingly looking at operating expenses and choosing more affordable areas,” said Studley's Ffrench.
Carmel Valley landlords have begun offering better deals to keep tenants, said Cushman & Wakefield's Wayne.
“Rates have slipped a bit,” Wayne said. “The velocity of tenant activity has hung in there, but it could slow – not just in Carmel Valley but in San Diego overall.”
Mike Freeman: (760) 476-8209; mike.freeman@uniontrib.com
