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2012 San Diego commercial real estate market forecast

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San Diego’s commercial real estate investment activity and leasing market fundamentals are anticipated to improve in 2012, but the extent of the improvements will depend heavily on regional and national employment growth. San Diego has been adding jobs for 17 consecutive months as measured by a 12-month net change in jobs, while the nation has been adding jobs for 16 consecutive months and the forecast is promising. Capital market conditions are expected to be more favorable than last year and the availability of debt from multiple sources with improving terms is expected to increase, assuming there are no additional shocks to the U.S. and global financial markets.

2012 will be all about gaining leasing traction and strengthening market fundamentals across all property types with more apparent improvement and growth across all submarkets and all property types expected in 2013 and 2014.

* Office: Overall vacancy is expected to decrease approximately by 1 percentage point to 18.2 percent in 2012. Flight-to-quality and renewals will continue to be the main drivers of leasing activity, with Class A leading the way. The fourth quarter of 2011 was the 10th consecutive quarter of positive Class A leasing. A total of 2.1 million square feet of Class A space was absorbed countywide during these 10 quarters. As Class A supply continues to tighten, demand for Class B space is bound to increase.

* Industrial: Leasing activity is expected to be stronger than last year, supported by a lack of new construction. The countywide direct vacancy rate is forecasted to decrease throughout 2012, yet not enough to support rent growth. Demand for space, supported by moderate improvements in the employment market and increased tenant confidence about making real estate decisions, will result in a shift in supply and demand balance leading to reduced vacancy rates in the central core submarkets. It will be well into 2012 before we see any sustained acceleration of leasing activity across all submarkets and all industrial property types.

* Retail: Continued pressure on asking rents and competitive concessions offered by landlords will support an increase in leasing activity in 2012, resulting in a moderate decrease in the countywide total vacancy rate from 6.4 percent in 2011 to 5.7 percent in 2012.

* Investment: 2012 will represent the year of transition from recovery to stability. The bidding wars in primary markets will drive investors, and therefore transaction volume, to secondary markets such as San Diego. However, a shortage of properties in San Diego that meet highly selective investor requirements will continue.

* Multifamily: Ample sources of low-interest financing combined with relative scarcity of supply have made multifamily real estate the star among other property types in San Diego County, a trend that is expected to continue. More speculative purchasing of land (raw and redevelopment) will continue in this hot sector.

In 2012, we expect to see advances in market fundamentals in all sectors of the market supported by San Diego’s diverse economy, including a strong military presence and growing industries such as technology, biotech, education and health care.

- Submitted by Jolanta Campion. Campion is the director of research at Cassidy Turley BRE Commercial.

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