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Reaser predicts B, B+ ratings for 2014 commercial real estate

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Analysts and industry experts say the commercial real estate market will see marked but steady improvements in 2014, part of an overall trend as the national and local economies finally round the corner on the recession recovery.

“Overall, we think that the commercial real estate area now is at the point that we’ll start to see new construction activity take place in 2014,” said Dr. Lynn Reaser, chief economist of the Fermanian Business & Economic Institute at Point Loma Nazarene University at an Institute of Real Estate Management economic outlook Friday. “We’re at that very significant inflection and turning point.”

Reaser, whose 2011-12 forecast was called the most accurate by the National Association for Business Economics, rated four sectors of the commercial real estate market based on expected sales, pricing, leasing activity and rental sales in the coming year.

Apartments and retail both received a B, while industrial and office sectors each earned a B+.

The good news on the apartment side is that decreasing unemployment and the decreasing affordability of homeownership are driving demand up. However, the construction of a significant number of multifamily units and investors buying and renting out single-family homes will keep these positives in check.

For industrial space, the lack of building in recent years that brought vacancy rates down, and the increasing demand for warehouses as the quick delivery of goods ordered online is necessary now, are expected to be balanced by static manufacturing activity throughout the county.

Similarly, not much new office construction will continue to push vacancy rates down, with Reaser forecasting Class A rates will come down to match the overall vacancy rate in 2014.

On the retail front, she said the slow downward movement of vacancy rates is caused in large part by the transition to online shopping, with existing malls forced to be not only shopping, but also entertainment destinations.

Randa Coniglio, executive vice president of operations at the Unified Port of San Diego, affirmed Reaser’s commercial real estate outlook, saying the Port saw healthy growth last year, and expects the same in 2014, when it will also hopefully see the opening of the 400-room Lane Field Hotel.

Jim Spain, regional managing director of Colliers International, agreed with the positive gains expectation, and said the key to stronger growth in 2014 is confidence.

“2013 was a year with some modest gains and I think that the No. 1 reason was just lack of confidence on the part of the decision makers, both large and small,” Spain said.

“Sequestration, defense cuts and uncertainty on government grounds really caused a bit of a slowdown throughout the middle of the year in 2013. San Diego, I think, is more tied to governmental activities than most metropolitan areas, so I think that slowed us down, but I think 2014 will be the year where a lot of that confidence comes back.

“I say that because I think the economic and retail cycles have reached a point where there’s enough momentum that, led by some of the industry cluster leaders here in San Diego that we have — technology, defense, telecommunications, life science and financial services — that those companies will pull us up and over.”

While Colton Sudberry, CEO and president of Sudberry Properties, agreed that 2014 should be a good year for the industry, he warned against generalizing too much.

“I think in San Diego in particular you’ve got to look at every sub-trade area, and you can’t paint it with a broad brush,” Sudberry said. “There are centers that we can get building and going on today in Mission Valley, and couldn’t even, with a hope and a prayer, get it going in other parts of the county.”

These expectations align with Reaser’s projected 28,000 added jobs in 2014 and 9 percent home-price increases. She also forecast national economic growth of 2.5 to 3 percent and a reduction in the Federal Reserve’s purchases of U.S. Treasury bonds and mortgage-backed securities.

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