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Executive Roundtable

Improvement seen in commercial real estate

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While the commercial real estate market appears to be improving in San Diego County, how much depends on the location and the asset class.

The state of commercial real estate and the availability of finance were among the key topics during a recent roundtable discussion at The Daily Transcript offices.

Steve Avoyer, Flocke & Avoyer president and CEO, whose company specializes in retail properties, says that asset class is considerably stronger than many people would think. Avoyer said a sampling of the average vacancy of 100 centers shows that the average retail vacancy is less than 5 percent.

"If the vacant spaces are in anchored centers, most are gone immediately," Avoyer said.

Avoyer added while retail tenants ask for rent relief all the time -- and there have been a few very notable store closures -- large move outs are still relatively rare.

On the office side, which continues to be challenged in downtown San Diego, the South Bay and in Carlsbad for example, Jay Alexander, Jones Lang LaSalle (NYSE: JLL) managing director, says there is reason for optimism there as well.

By JLL's accounts, the county absorbed about 640,000 square feet of net absorption in 2011. However, when the space is broken down between Class A and other space, a very different picture emerges.

"There's a real flight to quality," Alexander said.

For example, Alexander noted that while Sorrento Mesa had a 15 percent vacancy rate as of the end of last year, the Class A vacancy rate in the submarket there is in the single digits. Such a disparity isn't the case everywhere.

"Downtown's Class A space is still in the double digits," Alexander said.

Gary London, London Group Realty Advisors president, said most of the B and C spaces in downtown San Diego need to be repositioned in some way so they are residential or mixed use. Put simply, London says lower quality office space in downtown San Diego just isn't cutting it right now.

"These assets have to be repurposed," London said adding that there is just too much office inventory.

For those properties that aren't going to change their asset class, Marc Brutten, Westcore Properties chairman, said there are still positive signs.

"We have regained 50 percent of the jobs we lost and we're seeing some of the industrial buildings repurposed," Brutten said, adding that some buildings have even been reconfigured for basketball and volleyball uses.

"The challenge is some jurisdictions don't want to see those properties reused. They may want to keep these properties industrial," Alexander said.

Most seemed to agree that the prices of most office and industrial properties have stopped their freefall but the roundtable attendees added that it could be a long time before 2007 prices are seen again.

The story appears to be a similar one for commercial rents. Brutten said he is seeing office and industrial rents edging up in some places as well, while Athena Harman, Harman Realtors president, said some of her tenants continue to ask for rent relief.

"You worry they would break the lease and leave," Harman said.

Other realities of a changing environment may give landlords cause for concern. London said not the least of these issues is the fact that companies are shrinking the amount of space they use.

"Companies are compressing the amount of space per person," London said, adding that even executives are giving up what used to be the coveted corner office to be in a collaborative space.

Alexander said while companies are definitely cutting back on the space they use, it doesn't necessarily mean the landlord has to take a hit when it happens.

"If I can get eight employees in space that was meant for four, that ostensibly raises the rental rate," Alexander said.

If there is any asset class that is stronger than the others, it is apartments. Brutten said while it is still difficult for many people to qualify for a home, apartments are needed like never before here.

"There's not enough supply to meet the demand through 2014," Brutten said.

Jim Taylor, a Sperry Van Ness president, agreed there isn't enough inventory and said per-unit sale prices are already starting to climb significantly as a result.

"Apartments are pushing $200,000 a unit and a lot of them aren't that great," Taylor said.

The problem with building new apartments, notes Taylor, is the processing times can take four or five years before they are ready to come out of the ground. Once they are ready, the market may have changed significantly.

"We have a real shortage of supply, rents are going up and I'm worried we're going to have a rent control battle again," Taylor said.

Timothy Wright, Holliday Fenoglio & Fowler senior managing director, also expressed some concerns about rent.

"When the rent is $1,700 for a one-bedroom apartment in a new project, that's an issue and will be until we get more supply," Wright said.

On the lending front, the purse strings appear to be loosening a little.

"The bigger banks are really flush with cash and they are ready to spend it on good properties," Wright said noting that apartments and well-anchored retail in strong locations should get the funding they need.

According to Fitch Ratings, approximately 1,200 commercial mortgage-backed securities representing $17.3 billion in balances are set to mature this year. Wright didn't seem too worried about this.

"There hasn't been the bloodbath that everyone seemed to expect," Wright said.

Roundtable Participants

Jay Alexander, Managing Director, Jones Lang LaSalle

Steve Avoyer, President & CEO, Flocke & Avoyer

Anne Benge, San Diego President, Unisource Solutions

Marc Brutten, Chairman, Westcore Properties

Athena Harman, President, Harman Realtors

Gary London, President, The London Group Realty Advisors

Ken Sullivan, Principal, RPC Property Tax Advisors, LLC

Jim Taylor, President, Sperry Van Ness

Timothy Wright, Senior Managing Director, Holliday Fenoglio Fowler

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