The proposed DiamondView Tower by Cisterra Partners outside right field at Petco Park. Construction may start in March.

San Diego real estate executives seem downright giddy when they talk about growth in the regional office market. They have every right to be. New office construction is flourishing and will continue into 2005 while the sale of commercial office property — which rose to unprecedented levels this year — will remain red hot. “It’s a very exciting story to tell and one where investors and developers alike are seeing a market with a very strong upside,” says Kraig Kristofferson, senior vice president and partner at CB Richard Ellis.

Market forces driving the optimistic office projections for next year include a relatively healthy local economy, an expected office employment growth of 3.7 percent annually over the next two years and attractive interest rates for investors. The resurgence of Downtown San Diego as a place to live and play also is influencing efforts to place more offices in the area.

Gary Baragona, senior information management coordinator for CB Richard Ellis, says the office vacancy rate dropped to 10.2 percent in the third quarter and is expected to drop below 10 percent by the end of the year for the first time since 2002.

Mark Wayne, senior vice president of Burnham Real Estate, sees office vacancy dropping into single digits by mid-year, “a clear indication that developers will begin initiating spec development. The limited land supply in San Diego provides a natural cap to prevent overbuilding and also serves to create a sense of urgency for those companies who recognize that options for large campus developments are becoming increasingly limited.”

Baragona says new office developments under construction total more than 1.9 million square feet, 68 percent of which are in Del Mar Heights, Downtown and Temecula. The bulk of those open in 2005. “Construction activity has been solid during the year as approximately 400,000 square feet of new construction has been delivered to the market” through the third quarter, he says.

Eli Gilbert, director of research for Grubb & Ellis/BRE Commercial, estimates that more than 2 million square feet of new office product will come online over the next 12 months, nearly half pre-leased.

Lankford’s Broadway 655 building has an expected delivery date of June. The 23-story, 426,000-square-foot structure will include 372,000 square feet of Class A office space. It represents the first significant Downtown office building since One America Plaza, across the street, in 1991.

Pre-leasing is under way for Cisterra Partners LLC’s DiamondView Tower, a planned 306,000-square-foot office building just outside Petco Park. The structure was originally intended to open by early 2006, but construction may not start until March with completion in spring 2007 if financing requirements are met.

Prentiss Properties and Southwind Construction are developing a two-office building park totaling 157,859 square feet. Completion is expected in July.

In Del Mar Heights, Prentiss Properties and Southwind Construction are developing a two-office building park totaling 157,859 square feet that is expected to be completed in July.

Construction also has started on a new Class A office building at Liberty Station’s office district on the former Naval Training Center in Point Loma. Randy Levinson, vice president of office and industrial development for McMillin Commercial, says the two-story building will provide 36,000 square feet of office space and will be ready in April.

Another two-story building offering 53,000 square feet also is under way at the Point Loma site, representing the fourth speculative office building begun since the office district began its first phase of development in 2002. Eventually, the site will hold seven buildings and 380,000 square feet of office space on 22 acres.

“We are seeing a definite rebound in San Diego County leasing activity,” says Wayne. “Companies that began hiring again 12 to 18 months ago are now operating with as many as seven or eight people per 1,000 square feet, severely cramping their facilities. As their confidence in the long-term outlook for the economy continues to grow, these companies are making relocation and expansion decisions quickly and in response to a very real need for space for business and employees that already exists. This is a very healthy sign and in marked contrast to the hundreds of thousands of square feet that were leased by companies in 1999 who anticipated future hiring that didn’t materialize.”

The sale of commercial office space by institutional and other investors is at its peak. Jason Hughes of Irving Hughes says office property in San Diego is considered the “most ideal” in the nation. “San Diego properties are being targeted for acquisition from the largest pension funds, REITs and most sophisticated buyers ever seen,” says Hughes. “These investors are paying huge prices for these properties — betting that the future rent stream will increase to justify the investment. Office tenants, unfortunately, will be forced to pay inflated rental prices.”

The 91,163-square-foot Fourth Avenue Corporate Center at 1551 Fourth Ave. Downtown was sold for $15.15 million to JM 43 LP. Broe Real Estate sold the property but signed a five-year contract to continue to manage the building.

Last year had been the best office investment market ever in San Diego with about $1.36 billion in sales, says Baragona. By the end of this year’s third quarter, sales topped out at $1.6 billion. He sees next year’s sales activity increasing by 25 percent to 30 percent over all of 2004.

Among larger sales this year were CarrAmerica Realty’s purchase of Corporate Plaza II, a 116,166-square-foot, two-building office complex in Del Mar Heights, for $35.6 million from seller SSR Realty Advisors, and the 91,163-square-foot Fourth Avenue Corporate Center Downtown that went for $15.15 million. The Fourth Avenue building was sold to JM 43 LP and will serve as its corporate offices. CarrAmerica Realty’s Del Mar Heights holdings now total 450,000 square feet. Also changing hands was Wells Fargo Plaza on B Street Downtown, purchased from the California State Teachers Retirement System for $148 million by the Irving Co. in Newport Beach, which also owns the 34-story Symphony Towers.

“San Diego has definitely become a primary target for commercial office investment over the last few years due to the diverse economy, the job growth and all the other bells and whistles,” says Brian Driscoll, senior vice president of Colliers International. “As long as interest rates stay reasonable, the investment market will continue to be very strong.”

“The area that is particularly hot and will continue to be very hot is Downtown,“ says Hughes. “The consensus is that as a result of the tremendous infrastructure invested in Downtown, along with the mind-blowing number of residential developments, that Downtown office demand will trail the explosion of all the other incredibly high-demand real estate ventures like hotels, condos, retail and the like.

Griffin Properties LLC’s $15 million Rio Vista Plaza II is expected to be completed in spring 2005. The Class A office building will have four stories and 83,655 square feet.

“Eventually, the residents of Downtown, which are beginning to make up a very attractive work force, will insist on working Downtown, instead of hopping in their cars to drive to Sorrento Mesa for the day. This captive work force will play well with Downtown employers, creating a better quality of life for the employee and more productivity for the employer.”

But Hughes laments that only one new office building, Broadway 655, is under construction Downtown.

“To have only nine floors of contiguous space opening up after nearly 15 years of no new buildings in a central business district is really somewhat pathetic,” says Hughes. “While Cisterra’s ballpark project (DiamondView Tower) is being batted around, they have not landed enough pre-leasing, as of mid-November, to move forward on the building. I sincerely hope that they do. It would be a fantastic opportunity for tenants of San Diego.”