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Apartment sales rebounding, but other asset classes could take longer

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Large commercial property transactions have been few and very far between, but some asset classes have a better outlook than others.

While apartment transactions kept on going right through the recession, for more than 18 months the vast majority of the sales were for five units or less. Although still true for the most part, larger transactions are beginning to happen, though at vastly reduced prices.

In early April, the Transcript reported the sale of the 75-unit Fallbrook Village Apartments to DJS Properties Group LP of Rancho Santa Fe for $5.47 million in cash. The property had sold for $6.7 million in March 2002.

Chris Zorbas, a Marcus & Millichap vice president of investments, whose firm handled the Fallbrook Village transaction, said, "We are starting to see more buyer interest. There is a definite pickup in velocity. If a deal is priced right, it moves."

With store closures such as Circuit City, Mervyn's and Linens 'N Things, and Blockbuster Video (NYSE: BBI) and Movie Gallery (Hollywood Video) on the ropes, retail isn't nearly as attractive an asset class as apartments.

"It's a function of consumer spending. There's not a lot of demand for space," said Rob Johnson, an Marcus & Millichap senior associate and retail specialist.

Still, real estate investment trusts ranging from Kimco Realty (NYSE: KIM) in New York to the newly formed Excel Realty Trust (NYSE: EXL) in Rancho Bernardo, have expressed an interest in acquiring new retail assets. Kimco already owns some 3.6 million square feet of retail shopping centers in San Diego County.

Bill Thaxton, a Flocke & Avoyer senior vice president, said he believes San Diego County should start seeing some significant retail property sales later this year but emphasized he isn't expecting "a tsunami of activity" for the foreseeable future.

That said, Thaxton added that there is an awful lot of money on the sidelines awaiting the right opportunity.

"There aren't a lot a quality retail properties on the market. They will get snapped up as they become available," he said. "There are a lot of institutional buyers out there." Thaxton also said he doesn't expect large numbers of retail properties to go on the market as a result of foreclosure because lenders would generally like to keep these assets on the books -- even at a reduced cash flow.

Thaxton, who noted retail property owners aren't selling now unless they have to, said unanchored retail properties are the most vulnerable right now.

As in the case of apartments and retail, there is a major shortage of quality office properties in downtown San Diego. Kraig Kristofferson, a CB Richard Ellis senior vice president, said that other than the Robert F. Driver Insurance Building, which has had its fiscal troubles, he can't recall any other major office building for sale downtown.

Given that most of the downtown high-rises were purchased in all-cash transactions, said Kristofferson, their owners can afford to wait until the market improves before deciding to sell.

"There isn't the kind of pressure on these that you see on other buildings," he said.

There has been much more office building availability outside downtown. Kilroy Realty (NYSE: KRC), which recently purchased an 88,795-square-foot office building in the Mission City office complex in Mission Valley for $17.95 million, was in the process of acquiring the rest of the 279,800-square-foot property as of this writing.

Louay Alsadek, a CB Richard Ellis senior vice president, noted that along with the Mission City properties being sold, the 83,644-square-foot Rio Vista Plaza III in Mission Valley, the Horizon Tech Center in Scripps Ranch (developed by the failed Opus West Corp. firm) and the 170,000-square-foot Cricket campus at the Terraces at Copley Point are on the market as well.

"Things are definitely picking up," Alsadek said.

On the industrial side, Rob Hixson, another CBRE senior VP and chairman of the Otay Mesa Community Planning Group, had no details to report because the transactions hadn't closed by press time, but said one owner/user has expressed interest in a 40-acre parcel "and another is pursuing a 300,000-square-foot building" on the mesa.

Since the mesa has an estimated 3.5 million square feet of vacant industrial space, there may be plenty of bargains to be had.

As for hotels as an asset class, Robert Rauch, a hotel consultant, developer and owner, said San Diego -- with a few notable exceptions such as the givebacks in the Sunstone Hotel Investors (NYSE: SHO) portfolio -- hasn't been hammered as badly as many other cities. That said, Rauch added that the RevPAR (revenue per available room) has to improve significantly before prospective buyers and lenders see hotels as a good investment again.

"It's going to be 2013 to 2015," said Rauch. "Unfortunately, it's going to take that long before we see the average room rate turn around."

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