OPTIMISM AND ITS EFFECTS ON THE MARKETS

What happens when landlords feel comfortable enough to shake up the occupancy status quo by introducing new square footage into the markets?

Ask several people if they are optimistic about the economic outlook in San Diego and you may get different answers. One group that seems very confident include some of the county’s most successful developers/landlords like, the Irvine Company, Kilroy Realty Corporation, and CM Management, Inc. These three companies have development projects currently under construction or proposed in the near future.

Landlords are confident the markets can absorb a large amount of new and expensive office space. Irvine Company’s speculative project, One La Jolla Center in UTC, is being built in part to disrupt the status quo of occupancy rates. The occupancy rates in their portfolio of 11 of the most prestigious addresses in UTC were very high. In order to promote movement within the market they chose to introduce One La Jolla Center, an approximately 305,000 sf class A office building. This will surely shake up the market as the project is completely modern, LEED certified and will be expensive, with rents above $4.00/sf. The Irvine Company is confident there are businesses in the area that are willing to pay a premium to be in the newest, most advanced building in the market. That is a strong vote of confidence for the area’s economy. Kilroy Realty Corporation has a large presence in Del Mar Heights. They are also backing their confidence in the economy by opening up their wallet. Currently under construction is the Heights Del Mar (building 3) an approximately 75,000 sf of class A office. Also on their books is the One Paseo project in Del Mar that will eventually add another approximately 450,000 sf of class A office space. One Paseo is currently mired in public debate so the commencement date of construction is questionable at this time. CM Management, Inc. is getting into the mix as well with MAKE in Carlsbad. The plan is to demolish an existing industrial building and construct a very modern 177,000 sf of class A office space along Avenida Encinas.

These projects take several years to complete which means landlords had the confidence and vision to pull the trigger years ago. They are making a bet on San Diego’s economy and future.

How does this optimism effect the markets? Picture a Christmas snow toy where when you shake it up the effect is of snow falling onto the scene in the ball. When you “shake-up” the market by adding large amounts of new square footage, tenants will begin to move around. The new space will also be the most expensive in the market which will eventually cause upward pressure on rents in all buildings in the same class. Successful high image companies will inevitably want to move into the “latest and greatest” space in the market even at premium rental rates. That leads to vacancies in the buildings they just left which may be high image but older. The older space is also cheaper relative to the new space. That provides an opportunity for another company to occupy high image space (albeit older) at relatively cheaper rents. As landlords lose tenants to newer buildings they may become more motivated to offer concessions to fill their new vacancies. Again this could benefit a company looking to upgrade their image. This movement theoretically ripples throughout the market as companies take advantage of upward migration throughout all classes of buildings and attempt to improve their office space.

If you’ve been thinking about upgrading your company’s image now is good time to look into a move. Botticelli Realty Advisors represents tenants only. We can help you understand market dynamics caused by new square footage on a market and help you take advantage of opportunities. If you would like to discuss your situation in more detail please feel free to contact me at 760-445-9908, or my partner Vince Botticelli at 619-851-3556.

Thank you and I look forward to speaking with you all soon.

Brian Lukacz

WHAT’S IN STORE FOR THE REST OF 2014

Well we are just over seven weeks into the new year and I hope your business is off to a great start.  My post today is to pass on what I see happening in the commercial real estate market moving forward this year.  Before we move forward, however, let’s look back over our shoulder at the landscape of the 2013 year end trends.

By the numbers, the average vacancy rates for office space in San Diego County were as follows; Class A office 10.7% vacancy, Class B office 14.4% vacancy, and Class C office 7.7% vacancy.  The overall trend in all three categories was a slight decrease in vacancy during the course of the year and is one that has remained in place for the last few years. Continue reading