Apartment market cruises at top of commercial space: increasing office, industrial vacancies attributed to downsizing.

While the office and industrial markets both saw increases in vacancies, one commercial real estate sector, apartments, showed improvement, according to MarketPointe Realty Advisors.

The vacancy rate for multifamily buildings averaged 4.4 percent in September, down from 5.3 percent in March, MarketPointe reported. The company releases biannual reports in September and March.

"Despite the high unemployment rate, there doesn't appear to be a big exodus from San Diego County," said Robert Martinez, director of research.

MarketPointe surveyed 809 complexes with a total of 116,770 units countywide. The average monthly rental rate in September was $1,322, unchanged from March.

Vacancy stood at 2.25 percent in September 2008. According to analysts, however, a rental market with vacancies averaging between 5 percent and 7 percent is considered to be in balance.

"The South County continues to be home to the greatest number of complexes and units surveyed, but the North County continues to be the more expensive rental market," the report stated. Rent averaged $1,388 per month in the North County, and the vacancy rate there was 3.96 percent in September. In the South County, rent averaged $1,261 and the vacancy rate was 4.79 percent.

Rents for studios throughout the county averaged $1,025 while one-bedroom apartments went for $1,142. Two-bedroom units averaged $1,395, three-bedroom units averaged $1,780 and four-bedroom units averaged $2,194. One-bedroom apartments had the lowest vacancy rate at 4 percent while four-bedrooms had the highest at 7.38 percent.

Of the 22,708 new units added to the market since April 1998, 830 came on line within the last six months--a figure comparable to the prior six months. Meanwhile, an additional 220 condominiums were added as they were taken off the for-sale market.

Office Vacancies On The Upswing

Cushman & Wakefield commercial real estate brokers reported that office vacancy rates rose during the first half of the year while vacancies in the industrial market was dominated by downsizings, short-term renewals and relocations to less expensive space.

According to an August survey, office vacancy during the first half of the year was 15.8 percent, up from 14.1 percent at year-end 2008.

"Economic factors continue to cause downward pressure on tenant demand," said Eric Northbrook, executive director of the San Diego office. "Approximately 85 percent of the activity that is taking place is attributed to corporate downsizings or movement to more cost-effective locations."

Year-to-date at the end of June direct absorption was a negative 44,777 square feet, meaning that much office space went back on the market.

The average asking rent was $2.45 per square foot versus $2.85 per square foot at year-end 2008. The mid-city area, which includes Del Mar Heights, Governor Park, La Jolla, Miramar, Sorrento Mesa, Torrey Pines and University Towne Center, had the highest asking rent at $2.96 per square foot, while the South Bay, including Chula Vista, had the lowest rate at $2.60.

The total inventory of space countywide was 71.7 million square feet in 1,585 buildings. New construction completions amounted to 1.1 million square feet, while 478,250 square feet of space was under construction. Leasing activity totaled 2 million square feet.

Industrial Vacancies Also Up

"On the office side there's significant pressure on rents now as landlords compete against each other for transactions as small as 2,000 square feet," Northbrook said. "It's going to be competitive for the next six to nine months. There's too much space available, especially if you're looking for under 10,000 square feet."

A Cushman & Wakefield summary of the county's industrial market year-to-date through June showed that countywide vacancy rose to 9.1 percent from 7.3 percent at the end of 2008.

"The most significant vacancy increases have occurred in the northern and southern regions of the county where new speculative inventory has been slow to absorb," said Senior Director Mickey Morera. "However, even mid-county, which had virtually no new speculative development in almost 10 years, is experiencing higher vacancy as the slow economy prompts downsizing in virtually all business sectors."

The vacancy rate downtown was 6.6 percent. Otay Mesa had the highest vacancy at 19 percent, while Santee had the lowest at 3.3 percent.

Absorption countywide was a negative 2.4 million square feet.

Cushman & Wakefield's survey included a total inventory of 188 million square feet of industrial space in 6,619 buildings. Year-to-date leasing activity amounted to 3.3 million square feet. Absorption was a negative 2.4 million square feet.

Recently completed construction added 950,611 square feet of space while 200,097 square feet was still under construction.

Second quarter asking rents for the industrial market averaged 95 cents per square foot. This compares with $1.07 at year-end 2008.

"The moral of the story is that now is a great time to be a tenant," Northbrook said.