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Survey: San Diego County one of the top real estate markets nationwide

The commercial real estate markets appear to be improving across the board nationally, and San Diego continues to be out in front in the retail and multifamily markets.

The National Association of Realtors (NAR) predicts vacancies will decline in the office, industrial, retail and multifamily markets right through 2005 and possibly beyond.

The commercial real estate market is improving and vacancy rates are expected to decline in all four commercial market sectors this year, according to the NAR.

David Lereah, NAR's chief economist, said that commercial markets have gained momentum. "With vacancy rates in all sectors going down, the fundamentals for commercial real estate are improving and investors have been moving more dollars into this asset class," he said. "In fact, we expect vacancy rates to trend downward over the next two years."

NAR researcher Scott McIntosh said San Diego should fair well in each of the sectors.

"Everything in Southern California seems to be doing very well," McIntosh said.

Commercial real estate experienced a 53 percent increase in transaction volume last year in comparison with 2003; multifamily housing and office properties experienced the biggest gains.

For all sectors, commercial investment totaled $181.4 billion in 2004 compared with $118.8 billion in 2003. These figures do not include transactions for properties costing under $5 million.

In San Diego's office sector, nearly every major downtown office tower has changed hands during the past two years, and the prices have reached, or even exceeded, the $300 per square foot mark in some instances.

According to Gary Baragona, CB Richard Ellis information manager, office properties have been in such demand here that of 52 markets nationwide, San Diego County's office market was the second in the country behind Ventura County.

NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City, said improvements in the commercial market typically lag an overall economic recovery.

"Even with healthy economic growth over the last couple years, job creation really didn't pick up until 2004," he said. "Those jobs have fueled the need for commercial space, so the market is on solid ground and is experiencing a growing demand."

The forecast was produced with data provided by Torto Wheaton Research and Real Capital Analytics.

Office vacancy rates in the 57 markets tracked are forecast to decline to 14.2 percent this year from 15.4 percent in 2004. Office rents should rise by 2.8 percent in 2005, after rising only 0.4 percent last year. Increased absorption of space and a slowdown in the amount of new space coming on the market are improving office fundamentals.

Areas with the lowest office vacancies include New York City; Long Island, N.Y.; Ventura County, Washington, D.C.; and Orange County, all with vacancy rates of 11 percent or less.

San Diego's is slightly higher or lower than 12 percent, depending on the survey, and the office vacancy downtown has slipped into the single digits by many accounts.

Nationwide, net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, is projected at 61 million square feet in 2005, down from 77.7 million last year, but is triple the 20 million square feet absorbed in 2003.

In the retail sector, merger and acquisitions activity could lead to some store closings. If Blockbuster Video and Hollywood Video come together, that could be felt in San Diego. Toys R Us stores may also close once that business is sold to a new suitor, but the NAR report said such events should matter little to the overall vacancy in San Diego or elsewhere.

The NAR said retail vacancy nationwide should drop to 6.5 percent this year from 7.5 percent in 2004. Retail rent growth is forecast at 4.8 percent in 2005, up from 3.3 percent last year.

Retail markets with the lowest vacancies include Washington, D.C.; Oakland, Calif.; San Diego; Nashville, Tenn.; and Portland, Ore., with vacancy rates of 3.8 percent or less. San Diego's retail vacancy is believed to be less than 3 percent, making it just about the lowest anywhere. San Diego has been consistently first, second or third in the retail sector, according to most surveys.

Net absorption of retail space in the 57 metro areas tracked is estimated at 34.9 million square feet in 2005, up strongly from 27.1 million last year.

Retail space is in high demand in San Diego and generally across the country, and real estate investment trusts are a big part of that picture.

REITs focused on the retail sector, accounting for nearly 14 percent of retail transaction volume in 2004, according to the NAR.

Realty Income Corp. (NYSE: O) of Escondido acquired $193.8 million in properties in 2004. That firm has also started strong in 2005 with the announcement last month that it had acquired 24 Rite-Aid stores across the country for $67.3 million.

Vista-based Pan Pacific Retail Properties (NYSE: PNP) has been just about as active, having acquired $161.8 million or 2.4 million square feet of shop space last year.

In the industrial market, demand for warehouse and distribution space has fueled demand across the country. The national vacancy rate is expected to decline to 10.4 percent this year from 10.9 percent in 2004. Industrial rents, which slipped 0.6 percent last year, should rise 0.7 percent in 2005. The areas with the lowest industrial vacancies are Los Angeles; Long Island, N.Y.; Riverside, Calif.; Orange County, and West Palm Beach, Fla., with vacancy rates of 6.8 percent or less.

While industrial vacancies have dropped into the single digits by most accounts in San Diego County, this region wasn't in the top tier on the industrial side. NAR's exact ranking for industrial was not clear, but Baragona of CB Richard Ellis said this region is running about 24th in this sector.

Net absorption of industrial space is forecast at 134.8 million square feet this year in the 57 markets tracked, down from 176.5 million in 2004, but well above a sparse 16.5 million square feet absorbed in 2003.

The apartment rental market should see a decline in the average vacancy rate to 6.1 percent this year from 6.2 percent in 2004 as space absorption keeps pace with new supply, the NAR reports.

Even so, higher homeownership rates are dampening the performance in some areas.

Average rent is forecast to rise 2.1 percent this year, following a 1.5 percent rise in 2004. Areas with the lowest apartment vacancies are Northern New Jersey; West Palm Beach, Fla.; Los Angeles; San Diego; and Fort Lauderdale, Fla., with vacancy rates of 3.5 percent or less.

MarketPointe Realty Advisors has put San Diego County's rate at about 2.5 percent at present. San Diego continues to be one of the most sought after apartments markets in the country.

Nationally, multifamily net absorption is projected at 238,600 units in the 57 markets tracked in 2005, down from 264,300 last year, but much stronger than the 159,400 units absorbed in 2003.

Related Articles:

Commercial Realtors see distracted city, refocus on own issues (Feb. 23, 2005)

San Diego rated No. 2 commercial real estate market in U.S. (Feb. 18, 2005)

SourceBook 2005

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