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SAN DIEGO-When you consider most downtown commercial real estate markets, particularly on the West Coast, San Diego is the antithesis of the norm. While the downtown submarkets of San Francisco, Seattle and the Silicon Valley are experiencing promising recoveries, just the opposite is true here. In fact, Jones Lang LaSalle executives tell GlobeSt.com that certain suburban submarkets are surpassing downtown’s fundamentals with single-digit vacancy rates and higher rental rates than downtown.
Part of the reason for this phenomenon is the nature of office and industrial users here, Bob Prendergast, managing director in the capital markets area for JLL, tells GlobeSt.com. “Capital flows where the tenants go, and San Diego tenants don’t want to be downtown.”
As GlobeSt.com reported in April, the first quarter gave the year an uninspiring start, with the office market hitting a flat spot in the first quarter of 2012, according to a report by JLL. The report indicated that leasing activity had dropped 40%, and the market had recorded a minor occupancy loss with negative net absorption of 57,000 square feet. But tour activity had increased, and landlords like The Irvine Co. had begun to display their confidence in a recovery by raising asking rates in key submarkets.
One explanation for downtown’s laggardly pace is that while other West Coast markets are growing with high-tech software and social networking firms such as Google, Twitter and Facebook, San Diego’s tech industry is more vested in hardware like wireless medical and communication devices from companies such as Qualcomm. The typical worker for these users is not the 25-year-old, single, upwardly mobile employee who may bike to work, but the mid-30s or -40s family-oriented PhD who drives a mid-size compact or an SUV to work. For that employee, downtown San Diego—with its expensive and meager parking options—is not a desirable work destination.
Instead, Joe Bernstein, SVP, tenant representation for JLL, tells GlobeSt.com that some suburban submarkets such as Mission Valley, Sorrento Valley, UTC, Del Mar Heights, Kearny Mesa and Rancho Bernardo are attracting these tenants, with Mission Valley rental rates reaching $2.45 per square foot while downtown rates hover around $2 per square foot. Many companies are leaving or threatening to leave downtown, and large companies looking to establish a sizable footprint in San Diego are finding a dearth of big blocks of space in the downtown market, causing them to seek suburban locations—many of which are located close to major freeways.
Bernstein adds that the class-B market is also suffering downtown as former B tenants fly to quality A space that has now become affordable. “But we should start filling up the B space soon,” he comments.
Another detractor from downtown has been the departure of many defense companies due to general uncertainty in this sector. “There’s been a negative net absorption from defense firms because of uncertainty in the defense budget, a possible new administration coming in or the continuation of the old administration, so the defense cluster is on hold,” Jay Alexander, managing director in the landlord representation area of JLL, tells GlobeSt.com.
Still, the story is not all doom and gloom for the 9th largest city in America. Tourism, clean tech and biotech are still strong sectors for this market, and buyers and sellers are beginning to reach common ground downtown. The industrial market is strong, although there are shorter intervals from peak to trough, says Alexander, with no speculative development to be found.
“Things are improving, but not as quickly as many had hoped,” says Prendergast. “The market is liquid, but at the market price. There are many markets in the single digits, but they’re not spiking. San Diego remains the steady Eddie it has typically been.”
Carrie Rossenfeld Carrie Rossenfeld is a reporter for the West Coast region of GlobeSt.com and Real Estate Forum. She was a trade-magazine and newsletter editor in New York City for 11 years before moving to Southern California in 1997 to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics ranging from intellectual-property licensing and giftware to commercial real estate. She recently edited a book about profiting from distressed real estate in a down market and has ghostwritten a book about starting a home-based business.