With buildings that may be a fraction of their original worth, interest rates in the cellar and financing increasingly available, now may be the time to buy or even build if the asset class is right.
The state of the commercial real estate market was discussed during a roundtable at The Daily Transcript offices recently, sponsored by Pacific Building Group.
“We’re working with smaller owners to buy buildings,” said Simon Terry-Lloyd, an Irving Group vice president. “Debt is cheap and so are the purchase prices.”
Ross Caulum, a Scripps Health corporate real estate director, suggested a strong bond rating leading to favorable financing is helping Scripps Health bankroll its major expansion efforts. This work includes the $456 million, 108-bed Scripps Prebys Cardiovascular Institute — now under construction and scheduled to open in 2015 — and a planned $94 million second-phase expansion (a critical care building) at the Scripps Memorial Hospital in Encinitas. That project will feature 27 emergency department beds and 36 medical/surgical beds.
“We’re also undertaking seismic retrofits at our hospitals to comply with California regulations,” Caulum said.
Scripps is far from alone being busy. Jim Roherty, Pacific Building Group president, said his general contracting firm has been doing a lot of health care work, tenant improvements, some jobs for high technology companies, “and we’re starting to price some specific office buildings that could start six months or a year from now.”
Kevin Hill, a vice president of commercial asset management at H.G. Fenton Co., said most of its acreage has been built out, and 94 to 95 percent of the building spaces are occupied.
“It feels like things are getting better out there,” Hill said.
Fenton has developed roughly 4 million square feet of industrial and office property and in excess of 3,000 apartments in the region.
Dan Broderick, president of Cassidy Turley’s San Diego division, agreed that the commercial markets appear to be improving from a landlord’s standpoint.
“It feels healthy. There is good tenant activity and the rents are increasing,” Broderick said.
While the markets may be improving, Joe Perez, a partner with the accounting firm Squar Milner, warned the commercial real estate recovery may be pushed out until 2014, and said he remains concerned about a double-dip recession.
Michael LaBarre, a principal with Carrier Johnson, seems a lot less concerned. LaBarre said his design firm has become increasingly busy, particularly in the area of high-density apartments.
“We have five major projects under construction and two or three more shortly after those,” LaBarre said.
LaBarre said it would be a mistake for Carrier Johnson to focus on just one type of project, however.
“Diversity is the key. We’re working on life science, high-tech and corporate build-to-suits,” LaBarre said, adding that the public sector work that sustained many companies through the recession has tapered off.
As for the difficulty of finding financing for acquisitions, much depends on the asset class.
“The capital is plentiful for apartments. There is plenty of debt and institutional and private equity monies,” LaBarre said.
“For well-located anchored shopping centers, the financing is very available,” Roherty added, “but for unanchored centers it is sometimes impossible.”
Steve Avoyer, Flocke & Avoyer president and CEO, whose company specializes in retail brokerage, said whether or not the retail market is recovering “is a tale of two cities.”
Avoyer said while Target, Vons and Walmart — which in conjunction with Sunroad Enterprises is planning to be part of a 500,000-square-foot center on Otay Mesa — continue to fare extremely well, many lesser known brands are continuing to languish.
“The moms and pops are still having a very difficult time,” Avoyer said.
Avoyer said ground floor retail — a condition of approval for many downtown condominiums — has also continued to suffer well after the official end of the recession.
Retail in San Diego County may be a mixed bag, but that doesn’t mean investors aren’t still looking for places to build anew.
“There just aren’t that many sites left,” Avoyer said.
In the meantime, Avoyer said the explosion of burger restaurants and other tenants, ranging from fashion retailers to specialty markets, continue to get new and old retail spaces filled. For example, the former Border’s, Circuit City and Linen’s N Things locations in Carmel Mountain Ranch have each been refilled by tenants such as TJ Maxx, Sprouts Market and Nordstrom Rack.
On the office side, Roherty conceded he is worried that defense contractors unsure of whether or not draconian budget cuts may happen at the beginning of next year, will hold off on any plans concerning their space.
“It’s a pretty big concern,” Roherty said.
While this could be a major problem, Roherty added that softening the blow is the fact than many jobs at Camp Pendleton and elsewhere are nearing the end of their life anyway.
LaBarre added that while Carrier Johnson was doing a lot of military work three or four years ago, those jobs have tapered off.
There may be more fundamental problems. Caulum noted companies have been downsizing — not just because they have fewer employees — but because they are using fewer square feet per person.
“Every user of space wants to make it more physically efficient. That means space is going to get smaller,” Caulum said.
“You might see a reduction in workforce space, but an increase in collaborative space,” LaBarre added.
Given that downtown San Diego by most accounts has about 2 million square feet of vacant space and companies are shrinking what they have, filling space may seem a particularly daunting task. Broderick said companies that aren’t traditionally downtown could make the difference.
Broderick said he is hopeful efforts such as the EvoNexus incubator space may fuel what he hopes will be many high technology companies to move downtown. There is a 15,000-square-foot incubator space in the AT&T Building at 101 West Broadway explicitly designed for startup high-tech firms.
Steve Avoyer, President & CEO, Flocke & Avoyer
Dan Broderick, San Diego President, Cassidy Turley
Ross Caulum, Senior Director of Corporate Real Estate, Scripps Health
Kevin Hill, Vice President of Commercial Asset Management & Leasing, H.G. Fenton Company
Mike LaBarre, Principal, Carrier Johnson
Joe Perez, Partner, Squar Milner
Jim Roherty, President, Pacific Building Group (sponsor)
Simon Terry-Lloyd, Vice President, The Irving Group