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Land shortage seen changing SD commercial, residential development

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A lack of available land is seen changing all forms of commercial development in San Diego County, according to experts at a recent real estate meeting.

“The Otay Ranch projects are the last of a breed of masterplanned communities," said Gary London, president of London Group Realty Advisors and one of the speakers at a London Group meeting at the Hilton Garden Inn in the Carmel Valley area. "The only way we’re going to be able to accommodate the people coming (mostly births over deaths) is to build up rather than out.”

Alan Nevin, a London Group principal, said even at Otay Ranch “no new large lot releases will happen prior to 2015.”

“Where there is land, in the East County, for example, the predominant owner is the federal government,” added Larry Clemens, who developed the Aviara property in Carlsbad.

Clemens said long processing times also continue to be an issue. He said when the Academy of Our Lady of Peace school wanted to build science buildings and a parking garage, it took eight years to get entitled.

"The new NIMBY [not in my backyard] doesn't want any development," Clemens said.

London said that with large land tracts out of play, brown fields which have significant toxics problems, and old shopping centers that have seen better days must get a second look for new projects.

“Millennials [people born between 1980 and 2000] are going to continue to demand apartments,” London said. “Most of us aren’t going to be building single-family, and the price of housing is going to be significantly bid up.”

Nevin also focused on San Diego’s ever-changing demographics.

“Two thirds of all housing units have no one living in them who is under 18, and only one in seven households consist of a mom and dad and two kids," he said, adding that 25 percent of the people living in this county live alone. "The 'Leave it to Beaver' years are over.”

“The apartments are basically full,” Nevin said.

Moving his attention to the office market, London noted while Class A vacancies have moved into the single digits in some submarkets, the Class B and C spaces are a different story.

“Of the 120 million square feet of office space in this county, 80 million of it is in B and C space that has higher vacancies,” London said. “I don’t think we’re going to need to build any more office space.”

London said with file cabinets having disappeared and less square footage needed, the demand for office space will lessen.

London did say that The Irvine Co. may elect to develop a long-shelved, roughly 700,000 square-foot office tower at West Broadway and Pacific Highway near downtown San Diego's bayfront. But if constructed, it would snatch its tenants from existing buildings.

Robert Rauch, who developed the Hilton Garden Inn, said the county has about 58,000 hotel rooms, but will see about 600 added this year.

Rauch said occupancies, even at their worst, still averaged about 60 percent, before returning to the 70-plus percent ranges within the past year.

Rauch said he’s concerned that if some sort of a deal isn’t worked about between Congress and the White House over sequestration, business and recreational travelers could shut down their spending.

For now, he seemed cautiously optimistic.

“I think we are probably in the fourth or fifth inning of the recovery,” Rauch said.

Bill Speer, another London Group principal who specializes in retail, said that sector has rebounded much quicker than most would have expected.

Speer said about 50 million square feet of retail space in about 60 major projects is currently under construction in the United States.

Closer to home, Speer said all the ongoing redevelopment and expansion activity at the several of the seven Westfield malls here are a testament to retail’s resilience.

“You’ve seen the UTC expansion. Now, $200 million to $300 million worth of redevelopment is planned at Horton Plaza and another $200 million to $300 million is also planned at Plaza Camino Real in Carlsbad,” Speer said.

Speer said while the proposed acquisition by Office Depot (NYSE: ODP) of Office Max (NYSE: OMX) will likely lead to the closure of hundreds of stores and the loss of more jobs, it will force other retailers in that industry to become more efficient.

Speer added that while there continues to be double-digit increases in e-retailing each year, most physical stores will continue to survive.

London added that by cutting a deal with the state whereby it collects the taxes, e-retailer Amazon (Nasdaq: AMZN) will now be able to have warehouses in California to store books and other items.

This means the online retailer will not only fill warehouse space, but will dramatically shorten the delivery times.

“You might deliver in five to seven hours, versus a few days,” London said.

Looking at the state of capital markets, London Group principal Nathan Moeder said, “There’s a lot of capital out there saying, ‘Where can I go for yield?’”

Mortgage planning specialist Mark Goldman said money is definitely coming back into the real estate market.

“Most of the money is still waiting on the sidelines, however,” Goldman said.

That doesn’t mean the capital will remain idle forever.

“CDs are paying 1 percent," Goldman said. "You can’t live on 1 percent, where are you going to go? The smart money’s going to real estate. The dumb money has left the market.”

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