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Leasing in the New Century

For the past several months, most San Diego businesses have been taking appropriate measures to be sure their information and other technology-oriented systems convert over to the new millennium. And, rightly so.

However, for reasons that have nothing to do with the advent of the new century, those who lease office space in some of the more prime locations in the San Diego metropolitan area will need to be sure their location, space needs, lease terms and conditions are Y2K-compliant as well.

Because of all the preparations, whatever mischief to be caused by the so-called millennium bug will probably be confined to one or two elevators or HVAC systems shutting down at 12:01 on the first Saturday morning of the new century. My guess is that those relatively few situations will be corrected by noon that weekend day — well before business owners and their employees walk into their offices on the first business day of the new year.

What office tenants in Golden Triangle, Del Mar Heights and other prime locations will face Monday, January 3, 2000, and during the first few years of the 21st Century will be the centuries-old principle of supply and demand. Simply put, the new millennium will inherit the 1990s short supply of office space in Class A buildings and the resultant upward pressure on rental rates.

Rents in the newer Class A buildings in these and other areas have increased significantly and space availability is becoming more scarce. For the time being, however, there is a window of opportunity in the second-generation Class A-/B+ buildings, where there is still an ample supply of space and where rental rates have not increased as sharply as in the newer structures.

We cannot continue to take easy access to such space for granted, however. The demand side of the supply-demand equation is heating up. It seems everybody now in the Golden Triangle wants to stay there for good, and that doesn’t take into account new tenants wanting to locate there. Even a cooler economy will continue to attract major office expansions by existing tenants and an immigration of new office users from new business start-ups — all of which puts even more pressure on a limited Class A inventory.

One example of upscale office tenants on the move is high-technology companies. High-tech firm owners, managers and professional employees are typically younger adults who are bored stiff working in west Mira Mesa and Sorrento Valley. The lure of the Golden Triangle with its glistening mid-rise office buildings in park and campus settings and the bountiful array of fine restaurants and shopping is too great for many of them to resist.

Yet another Golden Triangle and Del Mar Heights tenant segment growing in numbers are Downtown law firms and other professional service providers who have intellectual property expertise and want to open additional offices closer to their high-tech clients.

The continued expansion of existing tenants and influx of new and nontraditional Golden Triangle and Del Mar Heights tenants will continue to push up space rates. Eventually, the issue will not be higher rental rates; rather the question will be whether there is space available at all. Tenants whose leases do not contain provisions to renew their lease or expand their space might well find themselves displaced and literally on the street, the victims of neighboring tenants who need their space and who do have such language in their leases.

By no means is the office space crunch in these and other prime locations a short-term nuisance. The squeeze is going to continue at least for the next three to five years until new and as-yet-unbuilt major buildings come on line to add to the inventory. A more immediate exception might be Del Mar Heights, a tight office market that is expected to begin to swing more in favor of tenants as inventory comes onto the market.

My advice to office clients in prime venues is to tie up as quickly as possible — that means immediately — as much space as they can foresee they’ll need for the next five years, until more inventory comes onto the market.

There are areas where space will continue to be readily available, although not Class A inventory. Sorrento Mesa/Valley will have a strong supply as some high-tech companies begin leaving for the “promised land” in Golden Triangle and Del Mar Heights. Mission Valley has an assortment of aging two- and three-story garden buildings and mid-level structures. Access and the difficulty in figuring out how to get to an address continue to be problematic for Mission Valley tenants, their clients and customers.

At least one workplace paradigm will follow us into the early decades of the new century. Despite all the media hype concerning Internet businesses, telecommuting and home offices, most of the business in our local economy will continue to be conducted in traditional office settings — separate and dedicated buildings or locations designed for work — not in home bedrooms and converted garages. The computer age has not displaced the need for businesses to interact within themselves as well as with other entities. If anything, computerization has created the need for more social critical mass and interaction.

People work best when they work in close proximity with other people. How and where office tenants and their employees will work in San Diego in the early years of the new millennium is a daunting challenge facing all of us who are interested in the future of our community.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.



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