January 22, 2002 Despite a notable slowing in tenant demand in 2001, Burnham Real Estate Services is forecasting that the San Diego County office and industrial/R&D markets are poised for a year of stability and even modest growth. Burnham says a new study shows the drop in tenant activity last year coincided with a decline in new construction — a scenario the Burnham firm believes is keeping any excess in supply within manageable levels. "Many firms postponed or scaled back expansion plans due to the softening economy," says Mike Philbin, managing director of transaction services with Burnham Real Estate Services. "However, building activity also slowed and this has kept the amount of new supply from threatening the basic stability of the office and industrial/R&D markets." This balance is clearly evident in the industrial and R&D sectors, where vacancy has remained relatively flat. Current industrial vacancy of 8.7 percent is on par with last year’s rate of 8.3 percent, even though the market recorded just one-third (1.6 million square feet) of the total net absorption that occurred in 2000. R&D vacancy rose by less than one point during the year to 10.3 percent, an increase that is attributed to 185,000 square feet of net negative absorption. "Industrial construction can shut down much faster than office and this has helped keep supply in check," says Mickey Morera, a senior v.p. with Burnham. "After peaking in 1999 with an amazing 7.1 million square feet of new space, construction slowed to 2.5 million square feet — a 65 percent decrease. This quick decline was a key insulator for the market as tenant activity declined." Industrial absorption in 2001 was 1.59 million square feet, about on third of the 4.6 million square feet the prior year. "The high absorption in 2000 is evidence of the strong tenant demand that was driving construction," says Morera. "Absorption slowed most notably during the early part of 2001, then surprised us in the fourth quarter with 572,000 square feet of activity. This was the strongest quarterly performance all year and something we did not expect following the 9/11 tragedy." Where the San Diego County office market is concerned, a four-point increase in vacancy during 2001 is still quite low by historical standards and does not signal an overbuilt situation, says Mark Wayne, a senior v.p. with Burnham. "Today’s vacancy rate of 12.4 percent is well below the 25.8 percent vacancy rate we had in 1991 following years of unprecedented construction that was not supported by demand," says Wayne. "What sets our current situation apart from the early 1990s is that the record building activity we witnessed over the past six years has been driven solely by demand." The Burnham report shows that from 1996-2001, the San Diego County office market added 14.4 million square feet of office space — a 35 percent increase. Demand kept pace — with new records being set for absorption, and vacancy falling to an all time low of 6.5 percent in 2000. In 2001, net absorption totaled 1 million square feet, down from 4.6 million square feet the prior year. Construction declined from 3.75 million square feet to 2.37 million square feet, with even less space on the drawing board for 2002. "Of the new space that is under way, 46 percent is preleased and this will help keep vacancy in check as the year progresses," Wayne says. Contributing to the rise in office vacancy in 2001 was a sudden influx of sublease space early in the year. "Many office tenants had committed to larger spaces than needed, and some decided to sublet instead," Philbin notes. "This has added 1.9 million square feet of under-utilized space to the market, most of which is located in areas that have grown the fastest like Sorrento Mesa and UTC. Quite of bit of this space is still occupied but is being marketed to provide tenants with economic options." In relation to total office inventory, available office sublease space represents just 2 percent of the market, Burnham research shows. "With each quarter, the amount of sublease space available is declining and we believe most of it will have worked its way through the market by the end of the year," says Wayne. The slowdown in construction, coupled with signs of an improving economy, point to steadily improving vacancy rates in all sectors of the San Diego commercial real estate market. "Barring any unforeseen events, tenant demand will pick up in the second and third quarters of 2002," says Philbin. "By year-end, countywide office vacancy should decline to 11.7 percent, industrial vacancy should slip to 8.5 percent, and R&D vacancy should remain flat at 10.5 percent." While construction activity has slowed across the board, it will not halt in 2002. "We will continue to see new office and industrial/R&D projects enter the market, but a much larger percentage will be build-to-suits with firm tenant commitments in place," Philbin noted. Where rental rates are concerned, record demand for space has driven office rates to as much as $3.35 plus electrical in some markets, although today rents in many markets have softened and could decline 5-10 percent. Industrial rental rates, which peaked in 2000 at 71 cents per square foot, have declined about the same, the Burnham report shows. Now, with tenant activity on the decline, certain concessions are back in vogue. "We are not seeing rental rates come down, as much as we are seeing landlords offer concessions in the form of more generous tenant improvement allowances and, in some cases, free rent," says Wayne. "Because the oversupply of space is expected to be absorbed quickly, we expect rental rates to start climbing again in about 12-18 months." The biggest hurdle facing the San Diego County office and industrial/R&D markets is the diminishing supply of available land for commercial real estate development in the submarkets where most of the growth has occurred. "Larger tenants recognizing this land shortage — particularly for larger campus facilities — were very active last year," Philbin says. "Some of the major acquisitions include: Intel, 31 acres; MedImpact, 28 acres; AMCC, 31 acres; and IDEC, 30 acres. Although absorption of employment land in the mid-county has slowed recently, if you average the annual absorption since 1996, there is less than a five-year supply of land left for development. This will cause future growth to take the form of redevelopment and re-use opportunities in the mid-county, or new development in the north and south county areas." Here’s how Burnham expects specific significant markets are expected to perform: • Sorrento Mesa accounted for 20 percent of all new San Diego County office construction over the past six years. This influx of new space, coupled with some tenant contractions, has caused vacancy here to jump to 26.6 percent, up from a previous all-time low of 6.2 percent. With no new construction on the immediate horizon and current strong demand, the area will stabilize in coming months, particularly as telecommunications, biotech and software firms execute growth plans. • UTC accounts for 15.6 percent of the county’s new construction since 1995. Most of this was speculative, and vacancy now stands at 14.4 percent — well below the area’s all-time high of 39 percent back in 1991. • Carlsbad more than doubled its office inventory in recent years. Low land prices were the original attraction for developers, but tenant demand just didn’t keep up with the new supply. Even with the county’s fourth highest net office absorption (263,000 square feet), office vacancy spiked to 33 percent in 2001 — nearly double its rate in 2000. On the industrial side, Carlsbad has fared better. The area’s 16.5 percent industrial vacancy rate is down from 28.5 percent three years ago. The R&D sector here also shows falling vacancy. Following a high of 32.5 percent in 1999, R&D vacancy now stands at 21 percent _ a number that should decline even more since no new construction is on the horizon. • Downtown has had minimal office absorption in recent years as most companies have turned to the suburban markets. There simply is not a lot of space available that can meet the multi-floor requirements of larger firms. Yet despite the suburban orientation that characterized recent years, downtown San Diego office vacancy remains stable at 8.3 percent. The surge in residential development and the planned ballpark will certainly be much needed catalysts for new office space. • Poway is emerging as a countywide leader in industrial construction and leasing. The 4.7 million square feet of new build-to-suit and speculative space Poway has added since 1996 makes it the sixth largest industrial submarket in the county. Poway accounted for nearly half of the county’s total industrial and R&D absorption, with 535,000 square feet of activity during the year. Vacancy is up slightly to 6.9 percent, and could fluctuate as more space is completed. Yet with only 161,000 square feet of new space currently under way, there shouldn’t be any long-term negative impact on the area. • Vista absorbed 339,000 square feet of industrial space in 2001, a much-needed shot in the arm for this submarket where just two years ago vacancy was a substantial 25 percent. Today vacancy stands at 14.8 percent. • Otay Mesa finished the year "third" in terms of net absorption with almost 300,000 square feet of activity. Otay Mesa accounts for 15 percent of the county’s total industrial building activity since 1996 _ or 3.4 million square feet. This area is poised for more growth since it holds 37 percent of the county’s total available land supply. Despite its solid absorption, vacancy inched up to 17.4 percent, due partly to 700,000 square feet of new construction that was only 50 percent leased upon completion. • Kearny Mesa and Miramar are older, well-established markets and showed little activity in 2001. However, their central locations are extremely valuable to tenants looking for space, and we can expect to start seeing redevelopment of the older inventory in these markets. *** The Southern California job market will experience a slowdown in growth for the first half of 2002. However, most companies are not anticipating large workforce reductions, find statistics from the 17th Annual Employment Survey commissioned by Thomas Staffing, an Irvine-based staffing services company. Conducted annually by an outside market research firm, the "Perceptions and Expectations Research" determines market trends and future hiring expectations in Southern California. This year’s survey sampled 582 randomly selected companies with a minimum of $5 million in gross annual sales, employing at least 25 individuals. Data was gathered between Sept. 18 and Nov. 9 from companies in San Diego, Orange, Los Angeles, Riverside and San Bernardino Counties. (All of the interviews were conducted after the events of Sept. 11 and the surveying company says the effect of the terrorism cannot be assessed regarding response patterns, response rates or cross-year comparisons.) When asked if the overall need for office employees would increase, decrease, or stay the same, 30 percent (down 5 percent from 2001) of survey respondents indicated that their companies expect an increase, while 10 percent (up 6 percent from 2001) anticipate a decrease. The resulting net hiring strength (derived from the difference between the increase and the decrease) was 20 points, down 11 points from 2001. Douglas M. Slack, president of Thomas Staffing, reported a mixed outlook for the Southern California job market after examining results from this year’s survey. "In 2002 the Southern California employment market will not sustain the high level of job creation that has occurred in recent years," says Slack. "However, even though job growth will be weaker than in year’s past, the good news is, despite economic uncertainty and world events, there is still positive job growth projected and the fundamentals of a healthy job market are present. "The lowered job growth may impact employer and employee expectations. From the employer perspective, limited job growth equates to a better selection pool from which to find quality candidates. In addition, it is likely that it will take employers less time to fill positions and there will be less pressure to increase salaries. "From the employee perspective, the survey shows that although there will be a slowdown in job growth, workforce reductions should be modest. However, because of the slowdown, it may be more difficult to switch jobs and take somewhat longer to find a new job in 2002." Every county surveyed experienced a drop in net hiring strength for 2002 when compared with the findings of the 2001 survey. In Los Angeles County, four out of eight job categories have a negative net hiring strength in 2002. Overall however, Los Angeles still has a positive net hiring strength of 14. With the recession of 2001 and the tragic events of Sept. 11, the net hiring strength is stronger than what might be expected. "The good times of the mid and late `90s are over, but the underlying economic strength of Southern California shows that the Southland job market is weathering the downturn better than many other parts of the nation," Slack says. This year’s survey also found that the economy is a much larger factor affecting employment levels for the first half of 2002. Whereas in 2001 only 16 percent of the survey respondents noted the economy as a driving force in employment levels, 27 percent noted the economy as the primary factor affecting employment levels for 2002. The survey also indicates that employment levels are increasingly affected by a decrease in sales (8 percent in 2002 compared with 3 percent in 2001). To offset decreasing sales, the survey shows that many employers are focusing on new products and markets. Up 5 percent from 2001, 8 percent of the respondents noted that new products and markets are the primary factor affecting employment levels within their organization. The position of customer service representative continues to be in high demand in the Southland. When survey respondents were asked if they expected certain job category hiring to increase, decrease or stay the same, 24 percent of the companies surveyed reported a projected increase for customer service representatives. The net hiring strength for this position did drop to 19 from 34 in 2002, but the overall outlook for the first part of 2002 remains positive. This year’s survey reports every job category experienced a drop in net hiring strength for 2002. Though lower, every category is still expected to grow and the net hiring strength of all categories is still positive. The category of general clerk faced the biggest decrease, falling 19 points to 2 points in net hiring strength from last year. Job categories that should retain close to the same growth as projected in 2001 are, administrative assistant (net hiring strength of 10) and marketing assistant (net hiring strength of 12). "This year’s survey results suggest that although job growth will slow across the Southland, the underlying health of the job market remains intact,” Slack says. “Moreover, the Southern California economy may be growing at a more sustainable and manageable rate.” *** The Union Bank of California Foundation has presented Senior Community Centers with a $15,000 grant. "The Union Bank of California Foundation provides financial support and grant assistance to a wide range of charitable organizations in the San Diego community," says Joseph Benoit, senior executive with Union Bank of California. "The Senior Community Centers provide valuable assistance to senior citizens in San Diego. The Foundation is proud to be able to provide financial assistance to such a worthwhile organization." "As a nonprofit service agency, Senior Community Centers has grown incredibly dependent on community donations to fund programs and services," says Paul Downey, president and CEO, Senior Community Centers. "We are grateful for the generous support of the Union Bank of California Foundation. The donated funds will go a long way toward helping us continue to provide quality services to help low-income seniors survive." *** A host of Spanish-language media outlets have joined together to support the first, countywide Latino Marrow Registry Drive to be held from 10 a.m. to 3 p.m. Jan. 26, at two San Diego Blood Bank locations, the South Bay donor center at 1717 Sweetwater Road, Ste. G in National City, and the North County donor center at 1340 West Valley Parkway in Escondido. Donors must be between ages 18 and 60, and in good health. The normal $73 fee will be waived for this Latino drive. "We especially need people of color to participate," says Hazel Sayers, director of the Stem Cell Donor Center. "A patient's most likely marrow match outside the immediate family is someone of the same racial or ethnic group. Unfortunately, minority groups are current under-represented on the national registry." Patients who are currently searching for a lifesaving marrow donor include: Martin Quiroga, age 4 (Bolivian), who is battling acute lymphoblastic leukemia; Natza Lipp (Mexican), who suffers from leukemia; and Kayli Almeida-Jankowski, age 2 (Brazilian and Caucasian), who is fighting a rare form of juvenile mylomonocydic leukemia. For more information, contact the San Diego Blood Bank at (619) 296-6393, Ext. 197, or visit www.SanDiegoBloodBank.org. *** Hector V. Barreto, administrator of the U.S. Small Business Administration, will be the keynote speaker at the CDC Small Business Finance Annual Meeting at noon Wednesday at the La Costa Resort and Spa. Barreto will address more than 300 representatives of the San Diego, Orange, Riverside and Imperial Counties' lending and business communities on the topic of "Helping America Get Back to Business by Strengthening America's Small Business Community." Immediately following the luncheon, Barreto will moderate a roundtable discussion to personally address the concerns and questions of area business people. *** The San Diego Advertising Club and American Marketing Association will discuss ethics and advertising at a seminar called "Truth or Consequences," from 10 a.m. to 1:30 p.m. on Thursday at the Quality Resort, 875 Hotel Circle South in Mission Valley. Among the topics to be discussed are truthfulness, fairness, conflicts of interest and client confidentiality. Speakers are: Gerry Wilson, president and CEO of the San Diego Better Business Bureau; Tom Di Zinno, president of Di Zinno Thompson Solutions; Abe Wishna, senior director of investor relations and corporate communications for Advanced Tissue Science; and Bill Newsome, deputy city attorney, city of San Diego. Lunch is included. Cost to attend is $40 for members and $50 for nonmembers with reservations. For reservations, phone Helen Baker at (858) 576-9833. ***  Click Below to View Previous Daily Business Reports January 1 January 10 January 2 January 11 January 21 January 3 January 14 January 4 January 15 January 7 January 16 January 8 January 17 January 9 January 18

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