Office Space Goes Begging in Sorrento Valley Area
It was a clear contrast: Last year, developers were essentially knocking down Applied Micro Circuit Corp.’s doors to entice the expanding young company into their new, Sorrento Valley-area office buildings. The bait included free rent, improvement allowances and, in some cases, partial ownership deals.
“We sure didn’t get that kind of negotiating when we first moved” to Sorrento Valley in 1983, said Buck Marty, AMCC’s director of corporate planning.
But the Sorrento Valley office market has changed in four years. On March 31, the area had a 41% vacancy rate, according to statistics compiled by C.W. Clark Inc., making it the most overbuilt office area in the county.
While more than 100,000 square feet of Sorrento Valley office space was absorbed or leased during the first quarter of 1987, more than 1.2 million square feet of office space remained vacant, according to C.W. Clark.
Tough Competition
As an office market, Sorrento Valley--at the intersection of Interstates 5 and 805--faces tough competition from office developments in the Interstate 15 corridor to the east, the Golden Triangle to the south, and Del Mar and Solana Beach to the north.
That growing supply of office space--coupled with increased competition from outlying office markets--has forced developers to become extremely generous in lease deals they offer to prospective tenants.
“The bidding war (for AMCC’s contract) was really competitive,” said Marty, who said AMCC was offered extended periods of free rent, ranging from six months to 18 months.
AMCC agreed to become the first tenant at Pacific Corporate Center, a 125-acre planned industrial development in the Sorrento Mesa area east of I-805. In July, AMCC’s offices and manufacturing operation will move into 100,000 square feet of space in two buildings on a 6.5-acre parcel.
Industry observers characterize the Sorrento Valley market as a classic example of supply outracing demand.
Vacancy rates were at a “reasonable” 23% in 1985, according to David Sharp of C.W. Clark. During the next year, however, nearly a million more square feet of space, most of which was situated on Sorrento Mesa to the east of Sorrento Valley, became available, pushing current vacancy rates over 50%, observers say.
Lease concessions from Sorrento Valley landlords can be as much as 40% of contract rates in larger deals, said Coldwell Banker broker Frank Wright.
Sorrento is not the only area troubled by high vacancy rates. The I-15 corridor running through Escondido, Rancho Bernardo, Rancho Penasquitos and Mira Mesa has a 33.5% vacancy rate, Sharp said. The Golden Triangle area centered on University Towne Centre has a 22.2% vacancy rate, according to Ron Barbieri, president of the Torrey Urban Research Institute.
Most of the new projects in Sorrento have park-like settings and wide-ranging, sometimes extravagant, amenities.
Naiman Tech Center features a Japanese restaurant and a fully equipped fitness center with tennis and volleyball courts, a Jacuzzi, steam rooms and a gym.
Near the Naiman center is Wateridge, which has emerged from bankruptcy proceedings that hampered its former owner, Equidon. Wateridge is marketing 280,000 square feet of office space in a campus-like setting that includes waterfalls.
The complexes opening in Sorrento Mesa are designed to attract corporate users who need space for offices and, perhaps, some light manufacturing. That contrasts with the office towers near UTC and Sorrento Valley’s low-rise manufacturing-oriented space.
Despite the glut, developers keep pitching new projects. McKellar Development recently announced the $45-million San Diego Design Center, which will include about 300,000 square feet of office space.
For McKellar and others, the Sorrento Valley area’s main attraction is its vast potential.
The San Diego Assn. of Governments has predicted that a million people will move into North County by the year 2010, and the Sorrento Valley area will be at the center of that population boom.
Additionally, many areas, such as Kearny Mesa, are running out of open land while Sorrento still has room to grow--an appealing feature for young companies. For example, AMCC’s contract with Pacific Corporate Center included an option for an additional 150,000 square feet.
The University Towne Centre area will offer a maximum of about 6 million square feet, but Sorrento can accommodate 15 million to 20 million square feet, according to Barbieri.
“I like to compare (the Sorrento area) to a kid who (quickly) grew six inches,” Wright said. “We’re growing like crazy. And we can say we’re going to be nice and tall. But our knees are going to hurt for awhile.”
Even with its new, upscale offerings, Sorrento’s location presents some problems. Restaurants in Sorrento Valley, for example, are few, said Ned Baumer, executive vice president and partner in Scripps Wateridge Associates. “There are nearly 10,000 people working out here,” he said. “Where do they go?” Compared to the University Towne Centre neighborhood, Sorrento is relatively isolated, he said.
An informal group of 30 developers, including Baumer, is trying to address the problems faced by Sorrento. The Sorrento Mesa Associates recently printed a map that highlights planned hotels, restaurants and retail outlets.
“Restaurants can’t afford to move into the area unless they can develop a three-meal flow,” said Ted Owen, vice president and director of the North City office of the Greater San Diego Chamber of Commerce. “The hotels can be the answer.”
At least five hotel sites in the Sorrento Valley area have been identified, including proposed hotels by Marriott Corp. and Ramada Inc., Owen said. One major obstacle facing hotel developers, however, is the U.S. Navy’s restriction on the height of buildings in the flight path of Miramar Naval Air Station jets.
It will take more than two years for Sorrento Mesa to absorb existing vacant space, Barbieri said, adding that it will take Rancho Bernardo as long as four years to absorb its current glut of office space.
“Contract rents are stabilizing or going up,” said Wright of Coldwell Banker. “But the effective rents (including concessions) are basically stable. They won’t start going up until the vacancy rate goes down.”
