The stage appears to be set for continued improvement for San Diego County's office, industrial, retail and apartment markets.
More than 85 percent of the office absorption in 2010 and 2011 had been of the Class A variety, which helped bring that vacancy in the central part of San Diego to less than 10 percent as of the end of 2012, according to CBRE.
This past year, CBRE (NYSE: CBG) noted that as Class A office space became more expensive and less available, B space began to fill.
“As concessions fall and rental rates continue to appreciate for Class A space, Class B will benefit as tenants seek more affordable options,” CBRE stated. “Well-located, high-quality Class B assets should see more tenant activity resulting in rental rate and value appreciation in 2013.”
Class B and Class C buildings could use some help in downtown San Diego, which still has roughly 2 million square feet of vacant office space.
The sale of high quality office buildings, after a lull during the recession, began picking up both in 2011 and 2012.
Notable sales during the past year included Emmes Master Services’ $135 million purchase of Columbia Center in downtown San Diego, Cruzan|Monroe and Cigna’s $121 million purchase of the roughly 350,000-square-foot DiamondView Tower overlooking Petco Park in downtown San Diego, and The Irvine Co.’s $52 million acquisition of the 200,000-square-foot Centerside I office building in Mission Valley.
Using transactions of $5 million or more as a benchmark, CBRE reported slightly more than $1 billion in office transactions in 2012, versus about $1.2 billion in 2011. The county hit an all-time high of $4.8 billion in 2007.
CBRE said with an abundance of debt and equity capital on the sidelines looking for quality buildings, industrial investment market deal volume and pricing should continue to improve over the next 12-18 months.
“The biggest challenge the (industrial) investment market will face is a lack of available quality product; nevertheless, we anticipate that institutional investors will continue their strong push on the acquisition front for 2013,” CBRE said.
The report didn’t mention the vacant industrial space, which ranges from 2.2 million to 3.6 million square feet, in Otay Mesa.
While a high figure, the number exceeded 3 million square feet by most accounts two years ago.
CBRE said the industrial leasing market outlook remains positive, with healthy demand for the foreseeable future.
“We believe the vacancy rate will continue to decline but will take a few years of steady activity before reaching 2006-2007 levels,” the report added.
The report stated until excess industrial supply is absorbed, only modest rent increases are expected, and new construction will remain flat.
However, the report added there "continues to be a general lack of adequate supply to meet demand for well-located assets and there is no new spec industrial product currently under development.”
In the fall of 2012, the H.G. Fenton Co. paid about $29.8 million, plus the assumption of $12.7 debt, for about 600,000 square feet in four industrial and office properties, on and around West 28th Street in National City, from a Collins Development entity.
Other notable industrial sales in 2012 included the acquisition of the 382,304-square-foot Sorrento Business Complex for $40.75 million and the Sorrento Pines Business Park for $12.8 million.
Both Sorrento Valley properties (Sorrento Business Complex was also previously owned by Collins) were sold to Parallel Capital Partners.
The county’s industrial sales volume for properties valued at $5 million or more rose to $553 million in 2012 from $482 million in 2011, $538 million 2010 and just $200 million in 2009.
“Institutional investors made up 48 percent of all industrial buyers in 2012, up from just 14 percent in 2011,” CBRE continued.
The CBRE report said there is an abundant amount of equity capital for retail properties -- particularly if they are grocery-anchored.
“Assets sold in 2012 were less high profile, more traditional neighborhood centers,” CBRE wrote.
Regency Centers had multiple sales in the county in the past year, including its $81.1 million acquisition of the Ralphs-anchored 139,302-square-foot Uptown District shopping center in Hillcrest, and its purchase of the 190,521-square-foot Balboa Mesa shopping center in Clairemont Mesa for $59.5 million.
The Donahue Schriber Realty Group paid $40.87 million for the 64,923-square-foot Del Mar Heights Village Center last year as well.
“San Diego retail market fundamentals are sound and we don’t anticipate any drastic local changes affecting market conditions," the report said. "Many local and national developers are looking for the next big opportunity in San Diego.”
Well-located apartment properties, meanwhile, continue to be purchased by REITs and other investors -- that is, when they are available.
REITs and other investors continue to purchase well-located apartment properties -- when they are available.
While for purposes of this survey, CBRE only tracked apartment complexes with 100 or more units, it tallied $773 million worth of sales last year, compared with $938 million in 2011, $680 million in 2010 and just $339 million in 2009.
Major apartment transactions in 2012 included the $147.5 million sale of the 540-unit Reserve at 4S Ranch near Rancho Bernardo to JPMorgan Chase (NYSE: JPM), the 402-unit Legacy Apartments by R&V Management for $91 million in Mira Mesa, and a $169 million portfolio sale that included the 312-unit Avana La Jolla -- formerly Las Flores Apartments -- in University City for $64.7 million to a Greystar Real Estate partnership in 2012.
The report stated San Diego multifamily market should see a modest increase in deal volume for 2013.
“More new product will be delivered starting next year, which may impact rents in some submarkets going forward for the next 18 to 24 months,” the report added. “The market could see a slight decrease in occupancies starting in the second half of 2013 in some submarkets, as the new product is delivered with the majority of new deliveries coming online in late 2013 and early 2014."