Paul King, first v.p. of Arden Realty, says North County’s office and industrial leasing market is healthy. (photo/lambertphoto.com)

North County’s office, industrial and research and development markets have rebounded strongly since the low point of late 2001, thanks to a strong economy, scarcity of available land in central San Diego and brutal commutes on I-5 and 15.

The trend carries across North County from Del Mar Heights up to Carlsbad and Oceanside along the coast, and inland from Scripps Ranch and Carmel Mountain Ranch to Rancho Bernardo, Poway and San Marcos.

“Healthy is the word I would use” to describe the leasing market in such areas as Rancho Bernardo, Scripps Ranch and Carmel Mountain Ranch, says Paul King, first vice president with Arden Realty, a commercial office landlord.

“My gut is what we hear from tenants, a lot of it has to do with the commute. People are fed up with coming down the 15 and sitting in bumper-to-bumper traffic,” says King.

The commercial and industrial/R&D markets have seen several large swings since 2001, say brokers and developers. After the tech bubble burst and the Sept. 11 terrorist attacks, the market tanked, with vacancy rates surpassing 20 percent in some areas. A large glut of new product coming on line at the same time contributed to the boost in vacancies. Since then, the situation has gradually improved, with vacancy rates as low as 6 percent or 7 percent in most areas in late 2005 and early 2006. Many experts expect the trend to continue with vacancy rates declining and rents going up for the next year or two.

Dennis Visser, a broker specializing in North County with Grubb & Ellis/BRE Commercial, says office rents in Carlsbad have gone from $2 per square foot in 2000, to about $2.60 today. Industrial and R&D rents have climbed from 74 cents to $1.05 over the same period. The “spike” in rents was due in part to a tightening in the market and increased land and construction costs, he says.

“They’ll (rents) continue to increase, but it’s not going to be at that pace,” Visser says.

At the same time, when vacancy rates reach the 5 percent to 7 percent range, says Visser, that triggers new construction, which is happening both in the coastal and inland areas of North County, and encompasses both office and industrial/R&D.

Across North County, says Visser, an inventory of 14 million square feet of office space exists, with 1.1 million more square feet under construction, and an existing inventory of 62.5 million square feet of industrial and R&D space, with 2.1 million square feet of new space under construction.

Visser predicts the current wave of construction in North County will continue through 2007, then dry up “for eternity, basically,” as the supply of available land dwindles.

Rendering of the five-story, 108,000-square-foot Pinnacle office building.

The lack of land has led some builders to tear down existing buildings and put up new ones, says Gary Williams, a commercial office broker with Colliers SVP. Overall, he says, supply is tightening and rents are going up.

“The rental rates in Rancho Bernardo have continued to go up; they’re at all-time highs right now,” Williams says.

One builder taking advantage of the trend is Chris Coseo, who has broken ground on a $30 million office building called the Pinnacle. The five-story, 108,000-square-foot building is on the west side of I-15 on Via Frontera in Rancho Bernardo. Coseo says he tore down a 26,000-square-foot building he owned on the same property to make room for the new project.

“You name it, this building has it,” says Coseo of the “Class A” project, such as a two-story lobby with marble, sandstone and travertine, underground parking and high-tech security. The building’s anticipated completion date is next March, and asking rents are in the range of $3.05 per square foot. Coseo says he hopes to bring in top-drawer tenants such as law firms, architects, engineers and brokerage houses.

“I’m really bullish on the market, extremely bullish on the market,” says Coseo, who will retain ownership of the building once it is up and running. He expects to have five or six tenants per floor.

Builder Chris Coseo has broken ground on Pinnacle, a $30 million office building. (photo/lambertphoto.com)

Coseo concurs that traffic, along with availability of housing in North County, have lured companies to the region. The proximity of executive housing — multimillion dollar homes in such communities as Poway, Rancho Bernardo, Rancho Santa Fe, Solana Beach and Del Mar — makes North County attractive to company owners and executives, he says. Less expensive housing also is available for employees.

“They move their business up here, they get off the freeway. Everybody’s happy,” says Coseo.

In spite of an upbeat assessment of the market by many brokers and developers, at least one local broker sees a less rosy picture. Dave Marino, of Irving Hughes, which represents tenants in lease and purchase transactions, takes issue with using vacancy rates as a barometer of market conditions. Vacancy rates fail to take into account such factors as subleases, space under construction or space soon to become available.

“To properly capture supply and demand analysis, you have to look at availability,” Marino says. And by that measure, he says, available office, industrial and R&D space in North County has been underestimated by what he calls the “brokerage industry.”

While rents have gone up in the past two years, he says, they have now stalled, and will not be going up any time soon.

“It’s not going to happen” in the next 12 to 24 months, Marino says. “It’s just a flat market.”

To bolster his argument, Marino points to two factors: What he calls “availability rates,” which reflect all types of available space, and the length of time that space is staying on the market. He says availability rates in such areas as Del Mar Heights, Carlsbad and the I-15 corridor are much higher than officially acknowledged vacancy rates. For example, he says, availability rates in both inland and coastal areas are in the high teens, and both office and industrial/R&D spaces have remained available for an average of 17 to 18 months or longer, depending on the specific region.

“So everybody’s running around talking about how strong the market is, yet you’ve got this incredible capacity drag on the market right now,” he says. “I would assert that you’ve got a supply problem. There’s too much space on the market for too long.”

Marino says current office rents range from $2.80 to $3.50 per square foot in Del Mar Heights to $1.90 to $2.65 in Carlsbad. Office rents range from $2.10 to $2.85 along the I-15 corridor in North County, he says.

Marino predicts office and industrial space landlords are in for a “rude awakening” in 2007. “They’ll have to lower prices to compete.”

The availability of space may depend in part on the specific requirements of the prospective tenant. Julia Querin, director of finance and accounting at Sequoia Communications, says her company has been looking for between 20,000 and 25,000 square feet for an R&D facility along the I-15 corridor between Miramar and Escondido. Although she is currently negotiating a lease, “For us, in particular, it’s pretty slim pickings.”

Dennis Valentine, chief financial officer for JMAR Technologies Inc., which develops laser-based equipment for imaging, analysis and fabrication, says his company began looking for a new space early last year, and was able to move in last November after making modifications to the property. JMAR needed about 23,000 square feet of office and lab space, and initially looked at such areas as Del Mar Heights, Sorrento Valley and San Marcos. The purpose of the move was to consolidate three separate company operations.

The firm eventually found a space in Rancho Bernardo. “I would say cost-wise this was the best alternative,” says Valentine. “It was very competitive compared with the other things we were looking at.”

Some real estate professionals say the pace of investment and new development in North County’s office, industrial and R&D markets is a testament to the region’s strong economy and future prospects.

Chris Wood, senior director of real estate development for Opus West Corp., has an optimistic outlook. His company soon will break ground on an office, industrial and R&D project on Palomar Airport Road in Carlsbad. The $60 million, 328,000-square-foot project sits on 25 acres, and will comprise a mix of R&D and office.

Wood expects increasing rents and strong demand for all types of products in the market, and his company’s project to be fully leased within a year of completion.

“I’m particularly encouraged right now with the activity we’re seeing in North San Diego. I think there’s much more activity in North San Diego than in Central San Diego,” Wood says. “We’ve seen tremendous growth over the past few years.”