The difference between hindsight and foresight is like the difference between a gourmet dinner and garbage. Time, place and arrangement. An unhurried meal in a five star restaurant with good friends, a great waiter, a superb chef and warm ambience create the setting in which all the ingredients come together to make an experience pleasing to the palate and the soul. Hours later, however, the same restaurant is closed, the staff and the friends have gone, and the remains of the gourmet dinner is keeping the rest of the day's trash company in the dumpster.

Chuck Wise

The commercial and investment real estate market in San Diego has gone through several of these "gourmet dinner-to-garbage" cycles, although, very few pundits are predicting the next downturn. In my 40 years of investment real estate experience in Southern California, the market conditions today reflect the apogee of market value relative to investment return. Put another way, to be an investor entering the San Diego commercial and investment market today, one needs to be: very good at adding value, very patient, very well-financed and have an unremitting belief that short-term values will continue to rise.

Existing owners who entered the market two or more years ago are generally living "high on the hog" and, until recently, have had the best refinance market since the 1960s to line their pocket with cash, without all the messy business of selling, exchanging and repositioning. Accordingly, the resale market has been as thin and expensive as a congressman's date at a Washington party.

So, where are the good deals in today's marketplace and how do we find them? Let's apply our three criterions of time, place and arrangement and see what comes up.

Time

Many investors rely heavily on quarterly market trends to predict the hot spots in the market. Sales volume, cap rates, price per square foot and average deal size help illuminate opportunities and potential danger. So far this year, for reported sales according to CoStar Comps, office transactions have led in volume with more than $675 million in sales, with industrial and apartment sales following at $548 million and $541 million, respectively. Retail deals have dropped off sharply since the first quarter, for a total volume of $262 million. Cap rates have trended downward for office (8.59 percent), retail (8.58 percent) and industrial (8.35 percent) with apartments showing a slight upward trend to 6.37 percent.

Price per square foot and average deal size have trended downward in retail ($141 to $67 and $8.3 million to $4 million) and office ($201 to $179 and $16,500,000 to $11,870,000). An upward trend in price per square foot and deal size has been noted in apartments ($132 to $150 and $4.1 million to $6.2 million) and industrial ($75 to $77 and $3.8 million to $5.3 million).

According to Pierce-Eislen Inc., sales of apartment buildings with 50 or more units have dropped through Aug. 31 to 21 deals and $212,678,002 total volume from 32 deals and $425,498,503 total volume for the same time last year.

I have seen more transition of apartment sellers into industrial and office properties as higher cap rates are sought. There has also been an improvement in the supply of apartment properties coming to the market as sellers take advantage of record low cap rates.

Our time equation also needs to consider political and demographic changes that can rapidly change our investment returns. The state and federal budget deficit, rising cost of doing business in California, crumbling infrastructure, static employment growth, more litigation and increased taxes will have a sudden effect on the climate for growth.

Place

San Diego is unique in its natural barriers to entry. With the Pacific Ocean to the west, Mexico to the south, mountains and National Forest to the east and Camp Pendleton to the north, San Diego has a confined space that is even more constrained by governmental restriction to growth. Given the mild weather, great scenic beauty and proximity to Southern California's 20-million-plus population and the bustling growth of Tijuana, our supply has remained far behind the demand to live and work in San Diego. Opportunities exist for investment in niche markets in which better than average returns are possible.

Condo conversion is a much friendlier process in El Cajon than in Oceanside. Indian gaming and related resorts are creating a need for housing in East County, North County and Southwest Riverside County. Mid City and North San Diego are experiencing new construction and redevelopment. Otay Mesa and the 78 Corridor are alive with new development. Coastal properties are trading for $300 to $600 per square foot (and up) and the demand keeps growing. Redevelopment of infill and beach-oriented sites into mixed-use residential/retail or residential/office projects can be rewarding.

Webster's New Encyclopedic Dictionary defines investment as "an outlay of money for income or profit" as opposed to speculation, "the assumption of a business risk in hope of gain." As the air gets increasingly rare in San Diego investment real estate, the "hope of gain" seems to be more the standard modus operandi. Opportunities will emerge as owners lacking the financial staying power are squeezed out under the burden of negative cash flow.

Arrangement

The success of any investment in real estate is greatly enhanced by the skillful management of each component part. Financing, leasing, asset management, maintenance supervision, property management, competitive positioning, promotional programming and tax planning are just some of the areas that need constant attention and fine tuning.

As apartment rents have skyrocketed, vacancies have moved to more than 7 percent in Southeast San Diego, Vista, Fallbrook and Oceanside in the second quarter of 2003. The San Diego metropolitan area has increased from 3 percent in the fourth quarter of 2002 to 4 percent in the second quarter of 2003, according to Pierce-Eislen Inc.

Rent concessions are becoming more common and operators are straining for creative methods to lure renters and maintain modest rent increases. Both office and apartment operators are offering free high-speed Internet with considerable success. The process of adding value through cosmetic improvements or a change in the structure and use of the property will continue to reward creativity highly.

The formation of investment groups can increase staying power, minimize risk and add collaborative value, as long as every member is committed to the long-term plan. Membership and involvement in professional organizations, such as Apartment Association, BIA, Broker Forums, CCIM Educational programs and seminars, are great ways to network and stay informed of issues and legislation that can dramatically affect your investment.

I am sincerely hopeful that five years from now, when all my newly refinanced loans are moving from fixed to variable interest, hindsight will reveal one long gourmet feast with no end in sight. I guess we would all like the foresight to know, "what are the chances?"

Wise, CCIM, is president of CCIM, San Diego, president of Wise Investment Properties Inc. and senior vice president of IPC Commercial in Carlsbad.