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Commercial markets better; mortgage lenders shrinking

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San Diego County's commercial real estate markets continue to improve -- but it is a mixed picture for the mortgage/finance community.

Jones Lang LaSalle (NYSE: JLL) wrote in its North American Banking & Finance Outlook that San Diego County's finance community has been a victim of what has happened at the macro level.

"Large banks [in San Diego County] are closing local mortgage operations and laying off mortgage-servicing employees, resulting in less demand for space," JLL wrote. "Local financial employment has remained flat over the last year, while virtually all other employer sectors have recorded gains."

Last August, Wells Fargo Bank announced it would cut 2,323 people companywide, including 87 from its mortgage lending units at Rancho Bernardo and Sorrento Valley locations.

On Friday, Wells Fargo announced it will cut another 700 people from its nationwide mortgage operations.

Some job cuts will occur here again, although the mortgage unit said it won't be as severe as those that came last summer. Still, JLL said there will be continued pressure for mortgage lenders to reduce the amount of space they lease.

"In 2014 we expect that the recovery for financial activities will remain muted compared to the broader expansion," JLL wrote. "The slow healing process in the banking sector continues to be a strong headwind to the overall economic recovery."

On the bright side, the JLL report stated that "increased clarity over financial regulations and improvement in the housing markets will aid prospects for financial employment this year."

With a 23 percent average increase in year-over-year home prices in 2013, according to the San Diego Association of Realtors, the county's existing homeowners are underwater less than in the past.

Zillow Inc. (Nasdaq: Z) stated effective negative equity rates, which includes homeowners with 20 percent or less equity in their homes, remain stubbornly high.

For example, in San Diego -- while the "regular" negative equity rate was 13.1 percent as of the end of last year -- the effective negative equity figure was 28 percent, or more than twice the level when those with 20 percent or less equity are included.

Kevin Thorpe, Cassidy Turley's chief economist, said anticipated growth in gross domestic product should bode well for commercial real estate here and across the country.

Thorpe -- during a recent meeting that the brokerage firm co-sponsored with SDSU's Corky McMillin Center for Real Estate at the new San Diego downtown library -- said while there has been an economic slowdown, he attributed it to the cold weather in much of the country. By some estimates, snow that recently fell on two-thirds of the country have cost the economy about $10 billion.

"The latest data is ugly and I'm telling you to ignore it as an anomaly," Thorpe said.

However, the Mortgage Bankers Association reported in February that originations of commercial and multifamily mortgages nationally are projected to grow by 7 percent to $300 billion in 2014. That figure is projected to then rise to $333 billion in 2016.

“Early indications are that commercial and multifamily lenders increased originations by 15 percent in 2013,” said Jamie Woodwell, MBA’s vice president of commercial real estate research. “This year will once again see fewer loans coming up against their maturities. But with still low interest rates, improving property fundamentals, a rebound in property prices and higher loan maturity volumes on the horizon, we anticipate mortgage originations will continue to increase in 2014.”

Outstanding commercial/multifamily mortgage debt is expected to continue to grow in 2014, ending the year at almost $2.6 trillion, more than 3 percent higher than at the end of 2013.

By the end of 2016, mortgage debt outstanding is forecasted to approach $2.7 trillion.

Looking at the different asset classes, Thorpe said the apartment markets are booming just about everywhere, including about 2,700 multifamily units that are now under construction or are soon to begin in downtown San Diego.

The office market isn't quite as strong. Thorpe has also noticed that demand for office space has shrunk significantly as tenants need less square footage per employee.

"The average amount of space per person is projected to decrease from 221 square feet in 2010 to 151 square feet in 2017," Thorpe said. "There is still a lot of vacant office space and the rate of recovery is rather slow. San Diego is still oversupplied. It has about 13 million square feet of empty office space. About 10 million square feet is equilibrium, and you won't reach equilibrium until 2016."

Thorpe added that "the flight to quality is still very much the rule and Class B and Class C space is massively oversupplied" here.

Thorpe -- who didn't mention Otay Mesa, which still has plus or minus 2 million square feet of vacant space -- said San Diego's industrial market "is on fire."

He said that about 6.7 million square feet of industrial space has been absorbed in the county in the last three years.

While concerns linger about the expected arrival of higher interest rates, Thorpe said a modest climb could actually spur more lending.

"The industry should be cheering for a controlled upward trend in interest rates," Thorpe said.

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