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Roundtable discussion

Commercial real estate activity picking up, but still sluggish

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The commercial real estate market is generally expected to improve in San Diego County this year, but is still far from normal.

The state of San Diego's commercial real estate market was the topic of a recent executive roundtable at the Transcript offices.

"Activity has substantially increased," said Marten Barry, NAI San Diego president. "There's a lot of leasing going on. For a while, most of the activity consisted of one-month or six-month extensions, but now more people are pulling the trigger on longer lease terms."

Mark Read, CB Richard Ellis senior managing director, said after bottoming out in 2009, his business has steadily improved. What's more, he is projecting double-digit increases in his offices' revenues this year.

By necessity, Read noted that brokerages are no longer just sales and leasing houses anymore. They now include such elements as debt and equity financing help, corporate services, along with a full line of management services. Put simply, diversification has kept the brokerages strong during the lean times.

John Agle, a First American National Commercial Services manager, said the orders for his commercial title services are up significantly.

"Our business was up 260 percent over 2009," Agle said. "And there are fewer lender-assisted transactions out there."

Agle said about 30 percent of his business comes from foreclosure and trustee fees.

"Until we burn through that, the market won't be normal again," Agle said.

Read said by his accounting, roughly 15 percent to 20 percent of the sales transactions his offices are handling involve distressed properties. It isn't a trend that Jerry Jacquet, Meissner Jacquet Real Estate principal, is happy about.

"The delinquencies in 2010 were horrible," said Jacquet, adding that they could get worse before getting better this year as well. "The retail sector is still reeling. This could be another brutal year without significant job growth."

There are bright spots. Chris Wood, Voit Real Estate Services managing director, said with rents off their peak by 25 percent to 30 percent or more, retail tenants may have the opportunity to hire more workers. They may find, however, that they are actually more efficient with the same number of workers and 25 percent less space, he said.

John Jarvis, an Irving Hughes principal, agreed with Wood that companies may actually be more productive with fewer personnel and without leasing space.

Read wasn't so sure.

"On the other hand, if you have people doing two or three jobs, you want to be careful. You don't want to burn them out," he said.

Jonathan Freeman, Cassidy Turley BRE Commercial acting president and CEO, said with a net loss of about 8 million jobs since the end of 2007, the country still has a long way to go if it wants to fill its commercial spaces.

"While we have gained back 1 million jobs, it could take anywhere from three to nine years to recover," Freeman said.

"You're not going to create demand for more space until that picture improves," Read agreed.

Mark Riedy, executive director for the Burnham Moores Center for Real Estate at the University of San Diego, said the current jobs situation has meant a flood of applications for internships at his school.

"We're overwhelmed with requests," Riedy said.

In the meantime, lenders appear to be loosening the purse strings and the commercial mortgage-backed securities market that had been given up for dead a couple of years ago has resurged back into national prominence.

"It's surprising how strongly CMBS came back ..." said Tim Wright, a Holliday Fenoglio Fowler managing director. "It will eclipse life insurance lending next year, if not before."

While CMBS may have returned, Riedy warned that after most recessions, housing comes back before commercial, "and the recovery in housing hasn't happened yet."

As for commercial property sales, Jarvis said there still isn't a lot of ready access to capital to make them happen. He also believes prices may not have bottomed out.

"Has the market really reset? I think most of the markets are still overpriced," Jarvis said.

Trophy properties such as the 360,000-square-foot Nobel Research Center, which recently sold for $128 million to the Alexandria Real Estate Equities (NYSE: ARE) real estate investment trust, are holding their value and generally have multiple bidders. Biotechnology firm Illumina (Nasdaq: ILMN) has signed a $335 million lease to take over the space being vacated by Biogen Idec (Nasdaq: BIIB) at the University Towne Centre campus.

Read said the fact that Biogen Idec was replaced so quickly (within weeks) is a testimony to the strength of the market.

"You might get 20, 30, or even 40 bids on a trophy property. When it's not, the bids drop off dramatically," Wright added. "I've watched retail assets sell for a fraction of their loan value."

Wright said in a market like this, there are going to be those who take the big-name properties and others who are out for a bargain.

"I don't think the guy who buys a property like Del Mar Plaza is going to be the same one who buys an unanchored center in Riverside," Wright said.

Read added that while he believes well-anchored retail will survive quite nicely, he isn't sure unanchored retail will come back at all.

Whether or not sales prices have reached their nadir, Wood said lease rates appear to have stabilized. While Jarvis still sees some weakness, he, too, is optimistic about the future.

"We're going to see moderate sustained growth. It's not going to be what we had, but it's sustainable," Jarvis said. "There are moderate signs of improvement following a flatline."

Roundtable participants

John Agle, VP

National Commercial Services

Marten Barry, President

NAI San Diego

Jonathan Freeman, Acting President & CEO

Cassidy Turley BRE Commercial

Jerry Jacquét, Principal

Meissner Jacquét

John Jarvis, Principal/SVP

Irving Hughes

Mark Read, Senior Managing Director

CB Richard Ellis

Mark Riedy, Executive Director

USD Burnham Moores Center

Chris Wood, Managing Director

Voit Real Estate Services Tim Wright, Managing Director

Holliday Fenoglio Fowler

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