The recent downsizing at Peregrine Systems Inc. is important to San Diego in terms of its raw economic impact. The company that once had about 760 employees at its Carmel Valley location, with more expected, now has only 340. It is an unfortunate turn of events for a software firm that was riding high in the late 1990s.

In July 1999, Peregrine made local real estate history, signing a 10-year, $175 million lease that remains the largest ever inked in San Diego. The deal covers 540,000 square feet spread over five buildings at the intersection of Valley Centre Drive and El Camino Real, just north of State Route 56. As such, that makes Peregrine by far the largest tenant in the Carmel Valley/Del Mar Heights markets, controlling 17 percent of the existing 3.27 million square feet.

It is an unfortunate time for downsizing to happen. The vacancy rate in Carmel Valley now stands at 13.1 percent, including available sublet space. That is the highest it has been since the area began attracting a substantial share of the San Diego County office market during the past four years.

The worst may be yet to come. Nearly 1.35 million square feet of proposed commercial office projects are in the pipeline. Add to this the vacant 430,000 square feet and the total future inventory is about 1.9 million square feet, at least a five-year supply by the absorption pace experienced over the past five years, if everything is built.

Of course all of this won’t be built. Plans for new buildings will be delayed until market conditions are more favorable. These plans are a positive for this market, illustrating confidence in its future.

Lease rates in Carmel Valley became the highest in the region, reaching $3.25 per square foot for the classiest Class A space. Today, rates are about $3.08 per square foot.

Evolution Of Carmel Valley

This bursting real estate bubble is new to Carmel Valley. The area has rapidly evolved from a sleepy suburban location in 1983, a creation of two large developers, Pardee Homes and The Baldwin Co., to a significant real estate presence, with thousands of homes, shopping centers and hotels.

Rather than being the growth exception in San Diego, Carmel Valley is the prototypical example of how the metropolitan area has grown. Early on, its working heads of households commuted to employment locations scattered throughout the metropolitan area. Its central location made it a perfect spot to commute from each morning.

While many Carmel Valley residents still do the regional commute, growing numbers stay in their community to work. The picture began to change in 1998 when the local commercial office market mushroomed from 1.4 million square feet to 3.27 million square feet with the addition of new office buildings principally along High Bluff Drive south of Del Mar Heights. Today, nearly 12,000 people are employed in that market.

Suburban Growth

As Carmel Valley’s employment picture has changed, so too has, and is, Greater San Diego’s. Historically, this metropolitan area is not dissimilar from most other regions throughout the United States. In the 1950s, when people began to move to the suburbs, they still commuted to the traditional city centers. However, most of the employment growth in the past two decades has been in the suburbs.

Illustrative of this is that in the last decade a major office building has not been constructed in Downtown, while hundreds of thousands of feet of mid-rise Class A space has sprung up in suburban office parks.

While at least one office high-rise should start construction Downtown soon, the target of broad employment growth will be in the South County, in or near Otay Mesa, Otay Ranch and Chula Vista. As that happens, the mid-rise office buildings will spring up and attract tenants, following the same pattern that has evolved in most North County communities along the Interstate 15 corridor and the Interstate 5 corridor north to Oceanside.

Firms try to locate within reasonable proximity to their employees’ homes. Spot studies demonstrate the majority of workers commute either within their own ZIP code or to an adjacent ZIP code for their jobs. This trend will only increase with the emergence of the South County market. The other phenomenon is linked to the avowed public policy to encourage housing additions in the existing and older communities. These are generally nearer to existing job locations.

The whole idea is to reduce the time and stress associated with commuting. San Diego’s freeway, road and transit systems simply have not kept pace with the rate of growth, a picture that is unlikely to change in coming years. Employers know this and respond with expansions and relocations either closer to where people live or would prefer to live.

Carmel Valley is all about convenience. Companies such as Peregrine locate there principally because they place a high priority on the comfort and convenience of their executives.

Temporary Conditions

Peregrine’s downsizing, whether temporary or permanent, will have the inevitable impact of dumping significant square feet onto a submarket that can ill-afford more vacancy. But it is a temporary phenomenon. The commercial office market certainly is at a weak point. It is a reflection of the downsizing of certain technology employment clusters, which are housed in that and other I-5 corridor markets.

The market will come back fast and strong, with or without Peregrine. The demand is inevitable with the continuing growth of the community, coupled with a scarcity of employment lands in the metropolitan market.

My advice to employers thinking of expansion is to make and take the deals now. It is not likely to get much cheaper. And this market will come roaring back.

Gary H. London is president of The London Group Realty Advisors Inc., providing real estate consulting and economic analysis. Check him out on the Web at www.londongroup.com.