As we enter the second half of 2011, capital market conditions, commercial real estate leasing market fundamentals and overall investment activity in San Diego are expected to continue to improve at a moderate pace. Uncertainty about the path and speed of the U.S. economic recovery will prolong the leasing fundamental recovery -- with the exception of the multi-family sector -- and influence investor confidence.
Tenant activity has improved across all property types due to gains in tenant confidence supported by lower rental rates and continued concessions. The volume of future leasing activity depends on the strength of regional and national employment growth. San Diego has consistently added jobs for 10 consecutive months while the nation has added jobs for nine consecutive months.
Property values have bottomed out. The rate of asset appreciation will be subdued due to leases signed at the peak of the market rolling over at much lower rates than pre-recession rents and resulting in a decreased net operating income over the next few years. However, investment activity is set to increase as investors who lost bids on core assets in primary markets across the nation are now considering secondary markets like San Diego. The availability of lending options has increased substantially and the terms have become more favorable.
According to Real Capital Analytics, the following sales volume numbers refer to properties and portfolios $5 million and greater (2011 YTD as of June 7, 2011):
Multi-Family: Apartment sales volume was $233.2 million, a 9 percent increase year-over-year. Publicly listed REITs accounted for 70 percent of all buying activity in San Diego -- compared to 43 percent recorded in 2010 -- followed by private and institutional investors. Strong fundamentals and favorable financing available through government-sponsored agencies have created a competitive market and fueled the recent increase in activity.
Industrial: Industrial sales volume was $235 million, a 51 percent increase year-over-year. Private investors accounted for 32 percent of total buying activity in San Diego followed by institutional investors (30 percent), publicly listed REITs (29 percent) and owner-users (9 percent). An increase in investment volume indicates that investors and lenders are gaining confidence based on the historical strength of the San Diego market and overall increase in tenant velocity.
Office: Renewals have been a main driver of office leasing activity, fueled by small businesses. The countywide direct vacancy has settled at approximately 17 percent for the last six quarters, confirming that the “bleeding” has stopped. A gradual recovery with minor quarterly setbacks is expected. Annual net absorption is expected to trend positive but at modest levels. Rents will continue to level off in 2011 and increase slowly in 2012 in prime submarkets. Owner-user investors accounted for 31 percent of total buying activity in San Diego followed by institutional investors (26 percent), publicly listed REITs (21 percent) and private investors (21 percent). Deal volume increased to $960.5 million in 2010 after bottoming out in 2009 at $471.2 million.
Retail: The retail leasing market has experienced a significant amount of new activity as a result of landlords lowering rents to secure tenants. Publicly listed REITs accounted for 63 percent of all buying activity in San Diego -- compared to 4 percent recorded in 2010 - followed by institutional investors (29 percent) and private investors (8 percent). However, private investors were the most active buyers from 2008 to 2010. Deal volume increased to $548.1 million in 2010 after bottoming out in 2009 at $264.8 million. Activity was primarily limited to Class A centers in prime submarkets, which is now changing due to lack of supply as well as investors considering a broader range of properties.
-Submitted by Jolanta Campion. Campion is director of research at Cassidy Turley BRE Commercial.
Cassidy Turley is a leading commercial real estate services provider with 3,000 professionals in 60 offices nationwide. The company represents a wide range of clients — from small businesses to Fortune 500 companies, from local non-profits to major institutions. The firm completed transactions valued at $17 billion in 2010, manages 430 million square feet on behalf of private, institutional and corporate clients and supports over 25,700 domestic corporate services locations. Cassidy Turley serves owners, investors and occupiers with a full spectrum of integrated commercial real estate services —including capital markets, tenant representation, corporate services, project leasing, property management, project and development services, and research and consulting. In 2010, the firm enhanced its global service delivery outside of North America through its partnership with GVA. Cassidy Turley provides regional real estate services with local San Diego market leader Cassidy Turley BRE Commercial. The company’s dominant market presence includes more than 160 professionals and staff in five local offices and recorded nearly $1.2 billion in transactions in 2010. For more information about Cassidy Turley BRE Commercial, please visit brecommercial.com.