The state of capital markets in San Diego, the state and nation was among the topics discussed at a NAIOP San Diego meeting Thursday at the Marriott Del Mar.
“I don’t know if capital for spec office building is available yet -- at least it wouldn’t be available without substantial pre-leasing,” said Allen Staff, Bank of America Merrill Lynch market president and regional executive.
Developer/investor Dennis Cruzan of Cruzan|Monroe -- which teamed up with Cigna Insurance to acquire the mostly filled 350,000-square-foot DiamondView Tower office and retail complex overlooking Petco Park for $121 million last fall -- is less concerned about speculative building. He worries about funds to buy commercial buildings in the $10 million range.
“There’s a real void in finding capital for $10 million deals right now,” Cruzan said.
Where do you go? Smaller community banks are one possible answer, Staff said.
“It’s clearly a question that gets asked a lot,” Staff said.
The major banks and funds are making substantial plays and both Staff and Dean Rostovsky, a Clarion Partners director and acquisitions officer, said there is plenty of capital available -- for the right properties.
Rostovsky said Clarion was involved in 27 major sales transactions for about $2.5 billion for office and industrial properties from Southern California to Seattle and as far east as Boston last year.
In San Diego County, Clarion has invested in properties from North City to Otay Mesa. Cigna has been even busier.
“We had $4.2 billion in loan originations last year,” Staff said. “We’ve been very, very active.”
Cigna and Clarion aren’t alone in bankrolling acquisitions. Nick Psyllos, an HFF LP, senior vice president who moderated the program, said the flow of capital is “like a switch has been turned on, and the amount of cash coming into the market is staggering.”
Staff said BofA Merrill Lynch’s loan volume in 2012, was roughly two-and-a-half times the 2011 figure.
“We have capacity to lend, though some product lines are healthier than others,” Staff said.
Well-located multifamily properties continue to be the favored office class, Rostovsky said.
While office space is much less favored, San Diego County -- which he pegged as having about a 14 percent vacancy rate today, could see the rate could go as low as 11 percent by the end of the year, Rostovsky said.
“That compares favorably with L.A. and Orange County,” he said.
Rick Reeder, a Cassidy Turley senior managing director, also said the office vacancy continues downward.
“We should have another one-and-a-half-million square feet of (office) absorption this year as it pushes us closer to single-digit vacancies,” Reeder said.
When Cruzan asked when office properties might return to their pre-recession peaks, Reeder said, “I believe it’s going to be sooner than most people might think. The basic fundamentals are very good.”
Psyllos said that along with an escalation in prices, an escalation in rents (The Irvine Co. led the way) has also begun in select markets such as University Towne Centre and Del Mar Heights.
Although they would like more properties to sell, commercial brokers have also noticed a pickup in sales.
“We’ve worked on a half a billion dollars in real estate transaction in the past 12 months,” Reeder said. “We’ve been through a couple of years of pretty good growth.”
Cruzan said his and Cigna’s $121 million purchase of DiamondView Tower was a key component in having $200 million in acquisitions last year. Cruzan|Monroe also paid $34 million for the 117,000-square-foot Plaza del Mar office complex in the Del Mar Heights area early in 2012. Clarion teamed up with Cruzan|Monroe on that transaction as well.
Cruzan said Cigna will continue to be a major investor in commercial real estate, and that he hopes to do more transactions with the multibillion-dollar Connecticut-based health insurance firm in the near future.
Cruzan said while there may be plenty of capital out there, the problem is there simply aren’t enough commercial properties on the market.
“The difficulty now is just finding deals,” Cruzan said.