San Diego’s swinging economy has leasing agents dancing steps they haven't used since the late 1980s. Vacancies are down, prices are pushing upward, and Downtown actually may see a new high-rise or two early in the new millennium.
    Office, industrial and retail space are all hot — and available, following a 1998 that ranked as the region's strongest year of construction this decade. All told, $3.9 billion worth of permits was issued. Commercial development totaled $907 million last year, including 1.2 million square feet of retail space, 2.9 million of office and 5.9 million of industrial/R&D.
    How did the action break down by area? San Diego, which typically accounts for roughly half of the county's construction, contributed $1.5 billion worth last year. North County and Chula Vista are poised to grab a larger share of the action. Carlsbad came on strong, issuing permits valued at $523.9 million.
    Meanwhile, demand for office space has raised prices in prime markets such as UTC and Mission Valley, driving some tenants to take a fresh look at rapidly revitalizing Downtown San Diego, which has been generating a ballpark-size buzz.

    Countywide, the office market has risen steadily since 1992, notes Mitch Ellner of E&Y Kenneth Leventhal Real Estate Group.
    "Our rents are climbing rapidly," adds Tim Cowden, a Downtown office specialist at Grubb & Ellis. "Average rates over a five-year lease Downtown were $2.75 to $3.10 at the peak between 1989 and 1991, then bottomed at $1.60 to $1.70 in 1993 or '94. Now we’re in a recovery cycle. High view space in newer Class A high-rises like Symphony Towers and One America Plaza is $2.20 to $2.35 and climbing. I'd say by the end of 2000 it'll be back to $2.65 to $3.10.
    "Last year was the biggest ever of Downtown absorption — 665,000 square feet of positive absorption. The previous high, in the late '80s, was 450,000. The first quarter of this year, we actually had negative absorption, but that doesn’t mean the sky is falling.
    "It’s a one-time aberration. For one thing, Bank of America, which has had vacant space for some time, just released 41,000 square feet and will probably make more available. They kept the space vacant while they were consolidating, absorbing Security Pacific, and now they want to lease some of it.
    "No speculative office towers have been built Downtown since 1991 — the last to be finished was America Plaza," Cowden says. During the last Class A boom, Downtown space increased from 4 million to 6 million square feet. All told, Downtown now claims about 9 million square feet of office space total, cites a Leventhal Group report. Including government offices, the total closes in on 14.5 million square feet Downtown.
    "It’s still very difficult to finance a speculative office building in Downtown San Diego until rents rise another 20 percent," Cowden says. "I predict that'll happen by the end of 2000. By that time, you'll start hearing some rumblings."
    Among the first tremors could be a quake from Catellus, which plans a string of high-rises on its long-held property along the railroad tracks north of the Santa Fe Depot. But the developer still needs to renegotiate its deal with the city, since certain entitlements have expired. Expect a concession or two, such as a park or museum.
    "I predict you'll see buildings built much slower — not five new high-rises coming on line at once, but one or two at a time," Cowden says. "As a result, you won’t see the kind of glut of office space we experienced during the early '90s."
    Downtown has been the beneficiary of rising occupancy and rents in competing Mission Valley and UTC. Mission Valley added 1 million feet of new Class A space during the most recent boom, while UTC built 3 million. Some tenants were lured from Downtown to outlying areas, including La Jolla and Del Mar, but now there is reverse migration, as companies find more choice, spectacular views, better rates, cool new housing that eliminates the commute — plus a lot more nighttime excitement — in the heart of the urb.
    Not everyone wants to go to town, however.
"I think what is driving this office market is where the decision makers live," says Jeb Bakke, first vice president at CB Richard Ellis. "Executives want offices closer to home."
    And that, according to Bakke, explains the strength of such North County markets as Rancho Bernardo and Del Mar Heights.
    "North County is where they live," Bakke explains. "Schools are better, quality of life is better for families in neighborhoods like Carmel Valley, Encinitas, Solana Beach, Del Mar, North Poway, Rancho Bernardo, Escondido, Penasquitos.
    "The most active in development is Rancho Bernardo. It has a 1.6-million-square-foot base, and 322,000 under construction."
    Three main projects are The Pointe, 186,000 feet of Class A space; Excel Centre at Park Terrace, 82,000 feet (including a big share for Excel); and Westridge, 54,000 feet being developed by Brehm.
    Office space is hot all along Interstate 15, Bakke said. Geico's move to R.B. from a flash-cube office building in Mira Mesa left a big vacancy — one now being filled by MedImpact, which leased 108,000 square feet of Geico's old space.
    And in Kearny Mesa, the 183-acre former General Dynamics property is redeveloping as a mixed-use complex that will become the area's focal point, including abundant new office space. Kearny Mesa also has Granite Ridge One and Two, 110,000 square feet of new offices, much of the space to be occupied by Clear Channel.
    Leading areas for new office construction are North University City/UTC, with 711,200 square feet in construction; followed by Carlsbad (474,800), Poway (433,300), Sorrento Mesa (327,900), Kearny Mesa (278,200), Rancho Bernardo (272,700), and Del Mar Heights (261,900).

    Meanwhile, industrial space is multiplying. As of this May, there were 7.9 million square feet in construction, plus 2.1 million of R&D space, as reported by John Burnham & Co. Biomedical, biotechnology, telecommunications and maquiladoras are occupying much of the new space.
    More space means more vacancy. For industrial space, the figure rose from 7.8 percent to 9.6 percent during the first quarter, as 3.2 million square feet of new space came on line. Net industrial absorption during 1999's first quarter was 1.3 million square feet.
    Carlsbad has been among the busiest places, with eight industrial projects adding 1.1 million square feet this year, doubling the area's vacancy rate to 26 percent — with much new space expected to be taken by the rebounding golf business.
    Poway absorbed 528,000 square feet of industrial space during the first quarter, well ahead of last year’s 1.1-million-foot pace. Vacancy in Poway stands at 16.8 percent, down from 19 percent at the close of 1998. Poway should continue to lead the industrial boom, with available land priced lower than in Sorrento Mesa and Kearny Mesa.
To the south, affordable land in Chula Vista and on Otay Mesa makes the area a leader in international manufacturing and distribution.
    The highest industrial rents of $7.50 to $8.50 per foot per year are in Carlsbad, South Bay, and the I-15 corridor, as well as in Sorrento Mesa/Valley and La Jolla. Rents in the central, East County and Otay Mesa areas are about $1 less.
    Burnham reports there is little danger of an industrial glut. At the moment, only 1.3 million feet of additional industrial space is planned countywide.
    "In the long range, the constraint is that industrial land is becoming limited," says David O'Rell, research manager at Grubb & Ellis. "Sandag has been talking about the need to rezone, so as not to have a shortage."

    Spend, spend, spend. Taxable retail sales rose to a record $19.6 billion in San Diego County last year and are projected to hit $20.9 billion this year, reports the Greater San Diego Chamber of Commerce.
    Regional malls represent some 13 million square feet, with another 43 million in neighborhood, community and strip centers, says Carol Hillestad at John Burnham & Co.
    Vacancy is close to its decade low at 6.5 percent for the first quarter of 1999, versus 6 percent last year, and a high of 9.4 percent in 1991 and 1992. The highest vacancy is in strip centers (11.9 percent), followed by neighborhood centers (6.1 percent) and community centers (5.9 percent).
    Based on slowing construction, vacancy should remain low. After peaking at more than 1.8 million square feet of new space in 1994 and 1995, annual new construction of retail space is now at about 500,000 square feet.
    Highest vacancies during the first quarter were along the Highway 78 corridor in North County (10.3 percent), in East County (8 percent) and along the I-15 corridor (7.1 percent). Highway 78 and East County also are the only areas with significant new space, which boosted their vacancies.
    Countywide, the 6.5 percent overall vacancy translates into 2.8 million square feet of available space.
    Major news includes Fenton Marketplace, Sudberry Properties' 535,000-square-foot power center due to open next year on Friars Road in Mission Valley, west of Qualcomm Stadium. At long last, San Diegans will have their very own IKEA (purveyor of hip, affordable home furnishings). The project also includes a Lowe's Home Improvement Center and a Costco.
    Other retailing highlights include:

• South Bay as the next frontier, with 20 major new residential developments supplying a steady stream of customers, says Mike Seiber, first vice president at Flocke & Avoyer Commercial Real Estate.
• Mission Valley as the "entry point" for retailers landing in the San Diego market, reports Flocke & Avoyer Commercial Real Estate. Major renovations at Fashion Valley and Mission Valley Center have made Mission Valley a retailing powerhouse again, competitive with regional malls such as Horton Plaza, North County Fair and UTC.
• Borders Books and Music has signed a ground lease for 13,000 square feet of land in the Gaslamp Quarter. It will be the site of a two-story, 26,000-square-foot store due to open in the summer of 2000.
• DDR OliverMcMillin's 30-acre, $80 million Vista Village urban retail project is due to transform the heart of Vista, with the first phase due to open late next year. The project includes 188,000 square feet of retailing.

    With office, industrial and retail space booming, you may find commercial leasing agents doing a dance of joy in the new millennium.