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Grubb & Ellis researcher: San Diego commercial real estate balanced, strong

Whether it is office, industrial, retail or multifamily, San Diego County's commercial real estate is in a very strong position, according to Robert Bach, Grubb & Ellis' national market analysis director.

Bach, who has been with Northbrook, Ill.-based Grubb & Ellis for the past 14 years, was in San Diego Thursday to train the research group here.

On the office side, San Diego's 8.7 vacancy in its central business district is still considered to be a very tight market, although not as tight as Bakersfield with 4.6 percent vacancy. The suburban office market in San Diego had a slightly higher level of 9.5 percent as of the end of the year, but that is also considered to be very strong.

Nationally, Bach noted that office vacancy started 2004 at 17.9 percent and ended the year at 16.8 percent, so it still has a long way to go if it is ever to get down to San Diego's level.

There were declines in San Diego rents in order to lure tenants into empty spaces in places like Del Mar Heights and along the Interstate 15 Corridor, but these tended to be less dramatic than those at the national level. This is another indication of San Diego's inherent strength.

Nationally, office rents still at rock bottom may be a problem for landlords, but Bach doesn't expect that to be a problem in San Diego.

As for investment, Bach said with practically every major downtown office building in San Diego sold within the past two years, investors will begin looking at B class properties to renovate.

While a couple of new office towers will soon grace the San Diego skyline, Bach said he expects the trend in most areas, including here, to be toward smaller, multiple buildings in suburban markets rather than building the large towers in the downtown cores.

Bach said San Diego should have enough demand for the new office towers, but that cities do have to be careful about allowing the construction of too much office space.

That being said, Bach suggested that while not immune from overbuilding, San Diego's diverse offerings should keep the buildings filled here.

"I think downtown San Diego is phenomenal. You have residential, retail and entertainment uses, and that will convert into office demand," Bach said before adding that these new tenants will be an eclectic mix from attorneys to architects.

Bach added that San Diego couldn't have picked a better time to revitalize its downtown.

On the industrial side, the issue for basic manufacturers here is the availability of land at an affordable price. In the county, "pure" industrial barely makes economic sense anymore.

Bach said if affordable land can be found, industrial buildings will always be in demand. He said while much of America's manufacturing has moved offshore, there must also be places to warehouse the huge flux of imports.

Despite the land shortage, new industrial space continues to be built in San Diego and around the country. In this county more than 2.9 million square feet was under construction. Nationally, it has been a bit of a roller coaster in recent years. At year-end 2001, 122 million square feet were under construction, dropping to a low of 50 million square feet in 2003 before climbing back up to 85 million square feet at the end of 2004.

While this is an improvement, Bach said the industrial space shortage is nationwide in its scope, which makes demand for industrial properties high nationally and in San Diego County.

When asked about the growing prevalence of industrial condominiums, Bach said it isn't something he sees in other parts of the country. "Small industrial condos are really a phenomenon of California," he said.

Like office and industrial, Bach said retail has gone through its cycles, but is looking extremely strong here, and very strong in the rest of the country as well.

"Retail has been popular nationally, but it has had its cycles. In the early '90s it was thought we were over-stored. Then there was a real fear that the Internet would kill bricks and mortar," Bach said before adding that those fears didn't materialize.

Bach said while there might have been a slowdown immediately following Sept. 11, that something happened after President Bush told people to start shopping again.

"It was suddenly our patriotic duty to go out and spend, and you saw sales and zero percent financing at General Motors," he said.

On another topic, Bach said while there is great fear around the country over the impact of Wal-Mart on an area (see related story), there will always be a place for the small neighborhood center.

Finally, on the multifamily front, Bach said the condominium conversion craze is indeed a nationwide phenomenon that will continue as long as interest rates rise and apartment occupancies tighten.

"Housing prices have gone up so much, and condominium conversion is a part and parcel of that," Bach said.

Related Articles:

Survey: San Diego County one of the top real estate markets nationwide (Mar. 16, 2005)

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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