San Diego's Rx for Malaise
The recession has dealt San Diego a tough hand. Most of the cards, including the office market, multifamily, lower-end industrial and hospitality, are weak. America's eighth largest city, however, can count on a pair of aces: high-tech and biotech. Those industries are responsible for most of the monster leases signed in the past six months in this city of green hills and dramatic ocean bluffs.
Few other cities can currently report real estate transactions on this scale: A major pharmaceutical lease for 125,000 sq. ft.; one for a provider of online college courses for 250,000 sq. ft.; several biotech deals ranging between 60,000 and 80,000 sq. ft.; and a European investor paying $161 million for a downtown office tower. Is San Diego on the same planet as the rest of us?
The post-Lehman Bros. economy has hit this seaside city hard. Most categories of real estate, in fact, look as whiplashed as other U.S. markets. Housing prices in the third quarter of 2008 fell 23% from the same period a year earlier and multifamily prices dropped 48%, according to Cushman & Wakefield. Industrial construction sank by more than 50% over the same period.
Despite real estate blahs in San Diego, aerospace and pharmaceuticals continue to pump life into an otherwise comatose market. While the industrial sector reported 514,000 sq. ft. of negative absorption in the third quarter of 2008, the industrial sub-category of research and development (R&D), actually experienced 118,000 sq. ft. of positive absorption over the same period.
Strong military and defense-related businesses are staples of the market. Those sectors were the biggest employers in San Diego decades ago when the city was known as a Navy town and the downtown Gaslamp district was better known for tattoo parlors than high-end retail.
Even after several rounds of base closures in the 1980s and '90s, San Diego still retains Marine Corps Air Station Miramar and a half-dozen smaller naval installations. Defense contracting also has survived: San Diego gets $27 billion in annual Defense Department spending.
Not surprisingly, defense-related tenants have been among the biggest customers for R&D and office space in recent months. At the forefront has been Lockheed Martin's commitment to 157,884 sq. ft. at the Horizon Technology Center at Scripps Ranch, developed by Opus West.
High-tech communications companies, in particular, sent a strong message to San Diego landlords in the second half of 2008. In November, BAE Systems, a maker of radar and satellite equipment, leased 80,000 sq. ft. at Liberty Station in Point Loma. Liberty Station is a former military base redeveloped by Corky McMillin Cos. in a joint venture with the City of San Diego.
Another communications equipment maker, InnovaSystems, leased 45,000 sq. ft. of build-to-suit space in Mission City Corporate Center, managed by Los Angeles-based Maguire Properties. To the north, in the city of Carlsbad, Sierra Wireless America leased 63,477 sq. ft. at the Faraday Corporate Center.
Biotech's big appetite for space
The largest office leases last year, however, came from a client only tangentially involved in technology: Bridgepoint Education, a company that offers college courses on campus and online. Last February, Bridgepoint added 147,533 sq. ft. in an existing lease at Kilroy Sabre Springs, for a total of 300,000 sq. ft. The lease requires the landlord, Kilroy Realty, to add a third building to the complex.
If the deal in Sabre Springs elevated Bridgepoint to one of San Diego's biggest tenants of the past year, the education company rose even higher on the list by leasing another 250,000 sq. ft. in the Sunroad Centrum building, owned by a local outfit, Sunroad Enterprises.
After high-tech and aerospace, San Diego's biotech companies signed some of the biggest leases in the second half of 2008. From its origins 30 years ago in small start-ups along Torrey Pines Road launched by professors and students from the University of California at San Diego, the region now boasts 500 biotech companies that have spread across the northern suburbs of the city.
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© 2012 Penton Media Inc.
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