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Commercial real estate suffers as residential market sees recovery

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While San Diego County’s residential and commercial real estate markets appear to be improving, they are a long way from being back to where they were prior to the recession.

Low apartment vacancies

Apartments have been strong, possibly because of the recession that kept people out of homes. Novato, Calif.-based RealFacts reports apartment vacancies have been low enough (around an optimum 5 percent) to foster the projected completion of about 1,500 apartment units in the county in 2012, and more are on the way.

One project that won’t be part of the new apartment developments in San Diego is Fat City Lofts in Little Italy. Originally planned for 232 apartments along with about 4,500 square feet of retail space, the project was converted into a hotel development with 364 rooms along with 2,500 square feet of restaurant and retail space. Solar Turbines, which said the apartments would have been incompatible with their business, was instrumental in the change of use.

While Fat City won’t be an apartment project, a few large for-rent projects have been emerging. Alan Nevin, a London Group Realty Advisors principal in the San Diego Association of Realtors’ Summer 2012 In Focus publication, cited three that are of particular note.

The 1,848-unit Casa Mira View development by Garden Communities of San Diego that is under construction is the largest of these by far. Other sizable complexes in the works include the 533-unit Carmel Pacific Ridge development by San Francisco-based Carmel Partners across from the University of San Diego in Linda Vista, and the 224-unit, 22-story Ariel Suites highrise apartments by Las Vegas developer Leo Frey in Little Italy.

Many homes still underwater, less houses being built

On the single-family home front, the wave of foreclosures that came with the recession seems to have abated, but houses continue to be significantly underwater here, as they are in most other parts of the country. In addition, while homebuilders continue to snatch up lots in places such as Southwest Riverside County, they still aren’t building many houses.

Brookfield Homes of San Diego, with offices in Del Mar Heights, reported that in April it opened escrows on 22 homes — the homebuilder’s best performance in four years. Still, the company is building a fraction of what it was five years ago.

Steve Doyle, Brookfield San Diego president, said he has sold 16 homes at Sago at The Foothills in Carlsbad since last March. Prices at the single-family development start at about $460,000.

“This is kind of a bipolar market. Certain submarkets in the North City and coastal areas have very little inventory available,” Doyle said. “We are measuring what’s available in weeks in those areas, while in the South and East County, the amount of inventory is measured in months.”

On the resale side, the California Association of Realtors said the state’s market continued to improve in May.

The San Diego Association of Realtors reported the number of single-family home sales amounted to 2,198 in May — about 26.39 percent higher than the 1,731 figure registered in May 2011.

The association tallied 9,396 single-family re-sales through May — a 13.56 percent improvement from the like period a year earlier. The SDAR reported the average number of days a single-family home was on the market in the county was still 79 days in May — unchanged from a year earlier. San Diego is faring a bit worse than the state average.

The median sales price of a resold single-family home in San Diego County was also unchanged year-over-year, at $380,000.

Both the SDAR and the CAR said that foreclosures have tapered off during the past year, while there continues to be more concern at the national front. The CoStar Group (Nasdaq: CSGP) reported that Steve Miller of Steve Miller & Associates Real Estate near Knoxville, TN, said: "the way Fannie Mae and Freddie Mac are handling the foreclosures, our housing market will never recover. Fannie and Freddie have only one or two agents in each area to handle all the foreclosures. Most real estate agents are avoiding even selling the foreclosures because of the paperwork and time involved."

Commercial real estate vacancies still high downtown

Commercial real estate has had its own problems that include bank-owned assets, loans that may be for twice what a property is worth, and maturing notes that a borrower will be unable to refinance.

“Commercial real estate is in danger,”’ Susan Lawrence, president of Real Estate Strategies Inc. in Winter Park, FL. told CoStar. “There is a lack of certainty about the future that could keep CRE slogging along for many years.”

CoStar warned there are a wide range of variables that could impact commercial real estate here, and across the country. Along with an inability to refinance, they include a stumbling housing market, the financial condition of tenants, existing debt overhang from the mid-2000s, lack of job creation and disorder in Europe.

Closer to home, CoStar notes that downtown San Diego still has 2 million square feet of office space left to lease. The good news for tenants is they have a wide range of options — but even here, the selection of large full floor plans remains limited.

Vacancy rates tend to be much tighter in suburban markets. A conclusion reached during a recent Daily Transcript roundtable was that the “flight to quality” that brought large numbers of formerly Class B tenants into Class A space for Class A rents, has pretty much ended as rents have climbed once more.

Most of the industrial submarkets have returned to near single digits, according to CoStar. By most accounts, more than 3 million square feet of vacant industrial space exists on Otay Mesa, however.

Rob Hixson, a CBRE (NYSE: CBG) senior vice president and Otay Planning Group chair, said there is plenty of good news on the mesa. For one thing, Imperial Toy is gearing up to double the size of its industrial warehouse on Air Wing Road from 120,000 to 240,000 square feet, and FedEx Ground is building a 150,000-square-foot distribution building on its 18-acre site.

“TJ Ventures has submitted its plans for the cross-border terminal that will connect with Rodriguez Field, and the (State Route) 905 will open all the way to (Interstates) 805 and 5 in September,” Hixson said, “and we’ll see the construction of SR 11 from Enrico Fermi Road to the 905 later this year.”

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