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Roundtable discussion

Residential real estate still suffering, commercial side a landlord’s market, say experts

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With residential development still languishing, those on the commercial side must work that much harder. With residential real estate no longer the economic engine it was before the recession, commercial real estate developers, owners and brokers must find more of their own strength to survive a still depressed economy.

The health of commercial and residential real estate were topics of a recent roundtable discussion at The Daily Transcript offices.

Jerry Jacquet, Meissner Jacquet principal, said while housing numbers are still dismal, he doesn't believe there will be a double-dip recession.

Jack Nooren, an NAI San Diego vice president, said multifamily is and will continue to be the stalwart for the foreseeable future.

Nooren said with qualifying for homes still a difficult proposition and a less than stellar economy, "we are creating a generation of renters."

Craig Stewart, Acre Investment Real Estate Services principal, said even making a six figure income doesn't guarantee someone a home. Stewart has a contract employee in his office who made $300,000 last year and wasn't able to qualify for a home loan from her bank.

"She wanted to buy a $500,000 condo and was willing to put $300,000 down, but they wouldn't lend to her because she didn't have three years of W2s," Stewart said.

Dennis Hearst, a CB Richard Ellis senior vice president, said depending on the property, the contention that it is as cheap to rent as it is to own is a myth.

"If you have a $600,000 home in Carlsbad and it rents for $2,450 per month, after the monthly payments, taxes and Mello-Roos it can cost 1 1/2 times to double the rental.

Hearst, renting for this very reason, said this has created a fundamental shift in the perception that one has to own a house, and suggested that many renters will likely be very glad they won't be saddled with huge mortgages.

Randy LaChance, a Voit Real Estate Services broker, is glad that home prices have come down even if sales are soft.

"We were unaffordable here," LaChance said.

Turning the discussion to retail real estate, Jacquet noted the strength of the attendance for the International Council of Shopping Centers annual convention in Las Vegas -- which last month featured 30,000 attendees and more than 1,000 exhibitors -- bodes well for retail.

"The attendance was half of that two years ago," Jacquet said, adding that last year wasn't a whole lot better. "It was much more upbeat this year and we came away with three more pieces of business."

Jacquet said while retail is still "horribly devastated," and the office market is still struggling back, there is good news in that San Diego hasn't seen a huge number of commercial properties go back to their respective banks.

Jacquet says where San Diego hasn't been buffered is in the area of small, unanchored strip centers that continue to languish.

Nooren said the story has been the opposite in many parts of the Midwest, where the guts of larger centers may have been ripped out with the demise of anchor tenants that unlike ones here, aren't getting refilled.

With a countywide retail vacancy that generally maintained less than 10 percent even in the depths of the recession, and tenants still clamoring for the best space, well-located retail landlords seem poised for the recovery. Office landlords may not be so fortunate. Downtown San Diego, for example, has roughly 2 million square feet of vacant space. The picture is better in most of the suburban office markets however.

Hearst said he has seen such bidding up of the rents in the high-demand Carmel Valley area that they could return to near $4 peak levels before very long.

LaChance said he likes the fact there is a much clearer picture where rents are going.

"I think I know where rents are going and I didn't know that a year ago," LaChance said.

On the industrial side, which had vacancies that were comfortably within the single digits until the recession hit, only to see those numbers double afterwards, LaChance said there is still too much supply.

"There still aren't enough tenants running around," LaChance said. "A lot of companies didn't make it. No one’s going to build industrial for a while."

While Otay Mesa -- with its more than 3 million square feet of vacant industrial space -- is considered to be an anomaly in the county's industrial world, other submarkets have been stronger. LaChance said even though the Kearny Mesa submarket may have gone from 2 percent to 6 percent vacant during the downturn, it is still very close to being a landlord's market.

The discussion then turned to 1031 exchanges.

Anthony Alosi, First American Exchange Co. vice president and region manager, said there was a tremendous drop in such transfers after the recession hit and the segment has yet to recover.

"The situation for exchanges has been almost like residential. Banks are unwilling to lend and you can't find a suitable replacement property," Alosi said. The other problem is in the case of large apartment properties, there simply aren't many available for sale.

"There are like 13,000 apartment properties here but only 120 to 130 are for sale," Alosi said. "All the money is on the sidelines. Nobody wants to be the first one to move."

But whether the properties are apartments, hotels, or office buildings, investors are jumping in when they see the opportunity.

Rita Hannah, a Colliers International senior vice president, said regardless of the asset class, "any building that is institutional quality will have multiple offers."

Nooren agreed saying that he had 17 offers on a 50-unit broken condominium conversion in Carlsbad and LaChance added that he had some 22 offers on a portfolio of multi-tenant industrial properties in the region.

Unless all the offers are all-cash buyers, it seems that someone is getting a loan. Hearst related the case of a medical office building that despite selling for $400-per-square-foot and being 70 percent vacant, the owner-user was able to find a lender.

"Money for owner users is definitely out there," LaChance adds.

But it's not there for everybody.

Roundtable Participants

Anthony Alosi, Senior Vice President/ Regional Manager First American Exchange Company

Sandy Colyer, Account Executive First American Exchange Company

Rita Hannah, Regional Vice President Colliers International

Athena Harman, President Harman Realtors, Inc.

Dennis Hearst, Senior Vice President CB Richard Ellis

Jerry Jacquet, Principal Meissner Jacquet

Randy LaChance, Broker Voit Real Estate Services

Jack Nooren, Vice President NAI San Diego

Craig Stewart, Senior Vice President/Principal Acre Investment Real Estate Services

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1 UserComments
Chris 11:30am June 28, 2011

Great article.