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Allan Matkins/UCLA Anderson

Forecast: Commercial RE still slow until after 2014

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If there are two words that encapsulate California’s commercial real estate markets, they are “cautiously optimistic.”

The state of California’s and the nation’s commercial real estate sectors with a nod toward San Diego were the topics of an Allen Matkins/UCLA Anderson Forecast session at the Hyatt Regency at Aventine on Wednesday.

Jerry Nickelsburg, Anderson Forecast senior economist, said unlike past recessions when a 5 percent gross domestic product (GDP) growth rate immediately followed the decline, the GDP growth rate this time is only running between 1 to 3 percent annually.

“The U.S. is muddling through,” Nickelsburg said adding that California and San Diego are continuing to work their ways through the downturn as well. “2014 will get above 2 percent and the growth will get gradually quicker after that.”

The problem, said Nickelsburg, is the growth in those applying for work are expected to continue to outpace the available positions. This coupled with positions that are going unfilled due to a lack of qualified applicants, and it’s not a recipe for growth.

The United States hasn’t been alone in the downturn. Nickelsburg said Japan is in the midst of a recession, and China, instead of a superheated GDP annual growth rate of about 9 percent that was the norm, “is hoping to do 7 and a half percent this year.”

This isn’t to say there haven’t been efforts to improve GDP here and elsewhere, but in the United States, Nickelsburg said negligible interest rates have done little to boost the economy.

“We have interest rates at zero and it hasn’t done anything,” Nickelsburg said.

Nickelsburg said despite capital markets that are awash in liquidity, money remains on the sidelines.

“The Fed has to get the liquidity out of the system to prevent inflation. Maybe they can, but it’s never been done before,” Nickelsburg said.

The economist said he believes interest rates will start climbing early next year.

“The Fed is going to have a tough time holding down long-term interest rates,” he added.

Nickelsburg said California lost 1.36 million jobs during this latest recession alone, and that about 550,000 have been restored.

“Orange County and San Diego are now growing at about the same rate as the U.S.,” Nickelsburg said.

After long being in the doldrums, Nickelsburg said residential construction has picked up, particularly with regard to multifamily.

Nickelsburg said home construction has begun to rebound as well but isn’t returning as quickly.

San Diego does seem to be faring better than the state in terms of distressed residential sales. While the number of distressed sales in San Diego is down to 14 percent, according the California Association of Realtors, Nickelsburg said 43 percent of single-family property sales in the state are still distressed.

“A question we have is for those who bought homes and lost them. Are they coming back into the market, or are they gone for good? It will make a difference,” Nickelsburg said.

With shrinking space requirements and a still uncertain economy, the San Diego office market has its own issues. With plenty of space yet to fill, vacancy rates are expected to remain fairly flat for the next three years.

“Rental rates will improve in some areas,” Nickelsburg said.

San Diego was ranked fourth in terms of perceived office market strength in the state behind San Francisco, Silicon Valley and Orange County, according to the survey.

Nickelsburg said it is difficult to determine what impact the sequester might have on San Diego County. He said while $8.5 billion in state cuts, including $3.2 billion to this region’s defense industry, could mean that at least some Navy repair contracts will be stalled here.

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