As published in The Daily Transcript, January 1, 2000

The 1990's have been a volatile decade for North San Diego County's R&D/Industrial market, which has weathered extreme highs and lows.

As a new year begins, there are numerous factors at work contributing to our overall economy. The nation is experiencing what most experts agree is a leveling of our current business cycle, which is being fueled by a combination of low interest rates, surging stock prices, an expanding population and the lowest unemployment rate in the past 40 years.

"These strong market forces, combined with historically low vacancy rates for North San Diego, led to a tremendous surge in building activity during the later part of 1998 and 1999," said Ronald L. King, a senior vice president of Coldwell Banker Commercial-North County Properties.

"This increase in building outpaced demand, pushing vacancy rates significantly higher than expected as we enter 2000," King said.

For example: Vista, with a 1999 base of 10,500,000 square feet, currently has a vacancy rate of about 15 percent. Carlsbad, which had a 1999 base of approximately 12,200,000 square feet, has a current vacancy rate of 20 percent. This is a far cry from the 5 percent vacancy rate experienced in the mid 1990's, which triggered the explosive building growth experienced in the past two years.

The building increase is not the only contributor to these high vacancy rates. David Onosko, also a senior vice president of Coldwell Banker Commercial-North County Properties, added that the economic slowdown in foreign markets, particularly in Asia, has strongly impacted a number of our local light manufacturing companies, causing them to downsize.

"Historically, demand in our real estate markets has been driven by requirements from local companies that have experienced rapid growth during the last 10 years, thus becoming financially strong and major forces in their industries," he said. "The decline in the overseas market has, in some cases, seriously impacted the growth of these companies."

King said that, while growth in high technology is up and unemployment is down significantly, to date it has not been enough to offset the effects caused by the tremendous building surge and declining foreign markets.

However, financial markets have acted like a circuit breaker, and have curtailed future development in the face of these excessive vacancy rates. "The increasing cost of land, along with higher building fees and the existing vacancies, will prevent any further speculative building in the immediate future, allowing supply and demand to reach equilibrium," King said. "Most projections are for vacancy rates to decline significantly during 2000.

Many of the sub-markets in San Diego experienced the same over-building phenomenon as North County, but some have rebounded at a faster pace. Markets such as Sorrento Mesa had high vacancy rates during early 1999, but experienced significant growth during the third and fourth quarter, pushing vacancies lower into 2000.

"The market in Poway, which has experienced growth in recent years similar to North County, has not experienced the same increase in vacancy rates, since most of its growth was due to build-to-suits rather than speculative construction," Onosko said.

Optimistic about 2000, both King and Onosko believe that North County vacancy rates should drop significantly during the first and second quarters. "Between 30 and 50 percent of the available inventory of buildings is concentrated in large buildings within several developments," King said. "If some of the large transactions currently pending are completed, we could see a dramatic reduction in vacancies by mid-2000."

Local developers share this optimism. "We are very pleased with Legacy NorthPointe," said Rich Simons, a vice president with Legacy Partners Commercial, developer of the 500,000-square-foot project in Carlsbad. "While demand has been slower than we would have liked, we have solid interest from several parties and hope that we will have a good portion of the project committed within the first quarter."

According to Charlie Abdi, senior vice president and partner of Koll Development Co., "During the past year, we realized strong demand for all of our development projects throughout San Diego County. Although North County trailed behind other areas in 1999, we are confident that we will see this market pick up momentum in early 2000.

Today, much of the demand in North San Diego County is driven from companies expanding from outside this immediate geographic area. "We have seen increased activity from other areas of San Diego County, as well as Orange and Los Angeles counties to the north," Onosko said.

King and Onosko agreed that qualified employees and affordable housing are areas of prime importance when attracting companies to North County, which compares favorably to the competition. North County offers a range of housing, from the most expensive to the most affordable, all within a 20-minute commute to any of its business parks.

Finding qualified employees can be a concern with unemployment at 3.9 percent in San Diego County. "However, North San Diego County offers a diverse employment base, with a disproportionate share of highly skilled employees," Onosko said. "North San Diego is also well positioned to compete with lease rates offered both further south in San Diego County, or to the north in Orange County."

By continuing to emphasize its strengths, experts expect North County to gain its share of the overall demand experienced in other parts of the country, and witness a sharp decline of vacancy rates by mid-2000.

"The future is bright for North San Diego, and while it is a major part of San Diego County's economic success today, it is destined to become an even more important factor as we move forward into the new millennium," King said.