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But new surtax may dampen

Economic, political uncertainty make real estate look good

With commercial property prices on the upswing, there is much to like about the investment climate, but a recent report warned a new tax law may dampen enthusiasm.

The report is by real estate brokerage Cassidy Turley in conjunction with the National University System Institute and the Corky McMillin Center for Real Estate at San Diego State University.

When the report was written in December, there were still worries about the "fiscal cliff."

Although that issue was temporarily resolved, the upcoming debt ceiling battle and other uncertainties now dominate discussions.

Some changes are already in place, having taken effect Jan. 1.

Chief among them is the new 3.8 percent surtax on investment income to help fund the new health care law that may keep many from making asset purchases they had planned this year.

“Fortunately, the longer the economic and political environments remain uncertain, the more attractive and logical commercial real estate will look as an investment,” the report stated. “Demand for income producing properties is expected to continue to grow, supported by improving fundamentals across all property types and the Fed's accommodative monetary policy.”

The report said the most sought after properties continue to be Class A trophy assets in the major metro markets with long-term leases in place.

Excluding hotels, which weren't part of the Cassidy Turley survey, office properties led the way in large commercial sales in 2012 -- despite the ongoing strength of multifamily.

Multifamily sales were second, followed by industrial and retail.

The report counted $1.15 billion in office property sales last year, a 10.5 percent decrease from the 2011 level.

Downtown San Diego major office property transactions in 2012 included the acquisition by Cruzan|Monroe and Cigna (NYSE: CI) of the 305,255-square-foot DiamondView Tower overlooking Petco Park for $120.9 million.

The seller, the Dutch firm Wereldhave, which is divesting all of its U.S. holdings, paid $161 million for the asset in September 2008.

Wereldhave has yet to dispose of the 376,703-square-foot First Allied Plaza at 655 Broadway here that it bought for $210 million in June 2007.

Other downtown San Diego office properties included the 553,715-square-foot Columbia Center for $135 million by Emmes Asset Management Co., and the $49 million sale of 359,218-square-foot 600 B St. to Lincoln Property Co. and Angelo Gordon & Co.

Suburban transactions included Boston-based Beacon Capital Partners' $152.5 million acquisition of the 641,693-square-foot San Diego Tech Center in Sorrento Mesa, and the 202,913-square-foot Centerside I in Mission Valley that The Irvine Co. bought for $52 million.

Cassidy Turley said how well the office market fares will depend on the submarkets' location.

“In the short-term (2013), recovery will be more evident in prime Central County submarkets such as Del Mar Heights, Sorrento Mesa, UTC, Kearny Mesa and Mission Valley,” the report said. “More evident improvement and growth across all submarkets is expected in 2014 and 2015.”

Retail property sales dropped off not because of a lack of demand, but because there wasn't enough property to sell.

“Due to the lack of quality product, annual sales fell 28.9 percent from $632.6 million in 2011 to an estimated $450.0 million in 2012,” the report stated. “Retail sales are poised to bounce back in 2013 with growth forecast at 10.1 percent.”

In San Diego, Regency Centers Corp. (Nasdaq: REG), paid $81.1 million to acquire the 148,638-square-foot Ralphs-anchored Uptown District Shopping Center in Hillcrest and paid $59.5 million for the 189,321-square-foot Balboa Mesa Shopping Center in Kearny Mesa.

“Triple net investments and shopping centers with grocery-anchored tenants will feed the majority of investor appetite,” the report stated.

The total sales volume of industrial sales countywide was $457.9 million in 2012, a 12.7 percent increase compared to 2011.

“Industrial properties are increasingly attractive to investors due to improved leasing and lack of new supply,” the report added.

A multi-property transaction totaling 562,309 square feet included about 400,000 square feet of former Collins Asset Management Group assets in and around the Sorrento Business Complex in Sorrento Valley, and the 150,000-square-foot One Technology Place development Collins owned in Rancho Bernardo. Parallel Capital Partners and Angelo Gordon & Co. paid $53.4 million to acquire the divided assets.

The largest multifamily transaction cited in the report for last year was the $91 million sale of the 412-unit Legacy Apartment Homes in Mira Mesa to a unit of R&V Management and other partners.

The seller in that deal was a unit of Garden Communities, now in the process of building more than 1,800 apartments in its Casa Mira View development nearby.

The total sales volume for multifamily properties of all sizes countywide was $608.4 million in 2012, a 40 percent decrease compared to 2011.

However, that will change in 2013 with Equity Residential's (NYSE: EQR) and AvalonBay Communities’ (NYSE: AVB) upcoming multi-billion-dollar buyout of Archstone.

Archstone owns more than 4,000 units in about 15 properties here, and nearly 60,000 units in 182 complexes across the country.

Cassidy Turley said landlords large and small should expect to see at least a 3.5 percent bump in rental rates, and a corresponding spike in operating revenues as long as the vacancy rates -- which are plus or minus 4 percent depending on the survey -- continue to decline.

With thousands of units in the works, vacancies may not stay down for long.

The report said an improving job picture should take up much of the slack.

“2013 will see vacancy rates continue their decline towards pre-recession lows and will see rents break free of the modest bumps of the past several years,” the report added. “[San Diego County] will add an average of 2,000 units a year until 2016.”

RELATED ARTICLES:

Archstone completes ‘evolution’ of Equity Residential, Zell says

600 B St. office tower in downtown SD sold

Columbia Center in downtown SD sold

Cruzan|Monroe acquires DiamondView Tower in East Village

Irvine Co. buys Centerside I for $52 million

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