The U.S. capital markets are in their healthiest state since the downturn with plentiful debt and equity capital for virtually all commercial real estate asset classes. Slow, yet steady, improvement in national economic fundamentals, favorable interest rates, increasing liquidity and the “great rotation” out of fixed-income assets has led to real estate investors entering buy mode in a big way. Foreign capital is zeroed back in on U.S. gateway markets, and in some areas demand has grossly outpaced supply, resulting in pricing that has surpassed prior peak levels.
The overwhelming demand and lack of supply in core markets has led to intense buyer competition and yield compression, resulting in capital moving both from primary to secondary markets and from core to core-plus and value-add risk profiles in search of yield.
San Diego is one such secondary market that has seen vastly increased interest from capital based both locally and nationally. With steady employment growth, positive net office absorption in 16 of the last 17 quarters and rapidly diminishing vacancy due in part to relatively conservative development in the last cycle, the San Diego market is looking very attractive to both institutional and private investors alike. The aforementioned is evidenced by recent Real Capital Analytics data, which states that San Diego commercial (office/industrial/retail) transaction volume in the first quarter of 2014 reached just over $1 billion, a 63 percent increase over the first quarter of 2013.
Commercial investment sales volume in San Diego is anticipated to increase as fundamentals improve while the region continues its recovery, which is now moving full steam ahead. Job growth has been evenly spread across San Diego’s extremely diverse economy with some of the largest gains made in the professional and business services, leisure and hospitality, and education and health services sectors.
In February, San Diego County recovered all of the jobs that were lost during the downturn. The region’s robust technology, life science and health care industries appear as strong as ever, and although local venture capital funding has been down slightly in recent quarters, seven San Diego companies went public in 2013 -- all from within the life science cluster. As the U.S. economic recovery and correspondingly, investment capital, continue to favor innovation and technology-driven markets, expect San Diego real estate to continue to reap the benefits.
-Submitted by Nick Frasco, director at HFF.