From Our City San Diego July/August 2013


Waking up

Medical and multi-family housing are helping commercial real estate to awake from a long slumber

 By David Ogul

Waking up Medical and multi-family housing are helping commercial real estate to awake from a long slumber There has been little new development inSan Diego since the Great Recession.  So, it was big news when Hines, an international development company, announced the construction of a 13-story office tower in University Towne Center last year. The reasons? Not only will the building be a net-zero energy structure (it will produce as much power as it uses), it already has a tenant, LPL Financial, ready to move in when the project is completed in 2014.

“We are seeing for the first time in a long time buildings that are pre-leased before they are even finished,” said Roger Simsiman, consulting chief operating officer at Global Building LLC, a commercial real estate investing firm. “In general, the commercial real estate market is improving in the San Diego region at a rate that is perhaps even better than what is happening nationally.”

Two areas are driving most of the growth: medical space and multifamily housing. The market for medical space picked up steam, thanks in large part to the opening of the $956 million Palomar Medical Center, in Escondido, last August and the impacts of ObamaCare, which is expected to increase health care demand. The result: Some 238,840 square feet of additional medical office space is under construction countywide.

In the multifamily housing sector, industry insiders are keeping an eye on how much the 1,410-unit La Mirage community, overlooking Mission Valley, will fetch. Market sources say an even bigger prize, the prime 549-unit Coronado Bay Club, with stunning views of downtown San Diego, could command a price tag between $150 million and $200 million.

“Everybody is looking to see what those will sell for,” said Darcy Miramontes, executive vice president of Jones Lang LaSalle, a commercial real estate services firm.

The industrial market has been improving as well, with the vacancy rate projected by many to drop to 7.5 percent, according to an analysis by Daniel T. Broderick, president and chief executive officer at Cassidy Turley in San Diego.

The turnaround is the result of myriad factors, including pent-up demand coupled with constraints on supply.  And, unlike before, when banks were in crisis, there is money for investors.

“It’s rare that I’ll see a deal that can’t get financing anywhere,” said Xavier Sheid, executive director of real estate finance at CIBC World Markets, during a panel discussion at the Crittenden National Real Estate Conference held recently at the Omni San Diego Hotel. “This is a great time for borrowers to be in the market.”

Gary Bechtel, chief lending officer at Business Partners LLC, agreed.

“Banks are getting back in the business because their balance sheets are much better than they were a couple years ago,” he said.

That’s not to say that every project will get funded.

“A poor property or an underperforming property is not going to get financed,” noted Simsiman.

Despite growing optimism, challenges remain. Office vacancy rates in downtown San Diego, for example, still hover near 20 percent at some buildings. And the Columbia Center building, which sold  for $135 million in December, brought about 25 percent less than what it sold for in 2007.

And new office construction in desirable areas such as UTC can be a double-edged sword, experts say. It’s attracting tenants, yes. But sometimes those tenants are leaving their current digs to move into the newly available properties, creating vacancies that in turn need to be filled.

As with most other properties, when it comes to office real estate, it’s all about location. UTC has long been a favorite because of its central location near major freeways and an upgraded shopping mall. And the Del Mar Heights area has become increasingly attractive because of its proximity to executive housing and its location north of the notorious merge of Interstates 5 and 805, Simsiman said. It’s a good place for investors to buy,” Simsiman said.

In fact, an investor recently purchased Foley Corporate Center at 11943 El Camino Real from Foley Development for an estimated $18 million, or $520 per square foot. The building was fully occupied at the time.

The select top office lease signed during the first quarter of 2013 in the San Diego market was at 12225 El Camino Real, not far from the Foley Corporate Center. Xifin Inc. is leasing 44,121 square feet at the site.

Multifamily housing up 56 percent

San Diego County ranks 21st in the nation for investor demand for multifamily housing, according to a report by JonesLang LaSalle that covers the year through May. There were 19 transactions through May 31 with a total sales volume just shy of $457 million, which is up almost 56 percent from the same period in 2012.

For the 12-month period ending May 31, demand for properties in the region was up 34 percent from the previous 12 months, with 65 transactions valued at $1.65 billion. The average Class A capitalization rate of 4.13 percent, meanwhile, remains among the lowest in the country. The cap rate refers to annual net operating income divided by cost or value.)

“Multifamily has been the darling of the commercial real estate industry for several years,” said Miramontes, of Jones Lang LaSalle. She added that it is not unusual to find cap rates – which tend to mirror interest rates – of under 4 percent.

Miramontes said supply will pick up with new construction during the next several years, but the new apartments “will be such a small fraction of the overall inventory that the risk of oversupply in San Diego is nonexistent.”

“It’s a tight market,” she added.

And that is pushing up rents. A recent report from the San Diego County Apartment Association showed a 4.5 vacancy rate in the region in the spring and fall of 2012, and average rents rising this past spring to $1,330 from $1,232 a year ago. North County has the tightest rental market, with a 3.8 percent vacancy rate. On the other end of the spectrum is the city of San Diego, with a 4.8 percent vacancy rate, which analysts attribute to recently completed units and numerous new single-family homes entering the market as rentals.

“There is no question these are good numbers,” said Alan Pentico, the apartment association’s executive director.  The housing market is growing rapidly, with low interest rates creating a flood of cash investors and first-time homebuyers.  But in spite of that, rental vacancies have held steady. That is impressive.”

Medical space

Finally, while folks in Washington continue debating the merits of ObamaCare, the Affordable Care Act, as it is more formally known, should yield increased demand for medical offices. North County should be among the areas that see the most activity due to affluent demographics, states Cushman & Wakefield’s San Diego Medical Office Report covering the first quarter of 2013.

“The areas surrounding Sharp/Rady Children’s campuses in Kearny Mesa and Scripps/UCSD campuses in UTC are showing strong demand and dwindling supply,” states the report. “More mature submarkets with limited land, such as central San Diego, may see some existing office buildings converted to medical use since new construction is still more expensive.”

David Ogul is a freelance writer. Follow

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