Fundamentals Remain Strong for SD Commercial Investment
Fundamentals Remain Strong for SD Commercial Investment
Article By: Lou Hirsh, San Diego Market Reporter, CoStar Group
Preliminary data from CoStar Market Analytics showed transaction dollar volume holding steady in the first quarter, though lagging behind year-ago levels in all of the major categories except industrial. As of March 30, the local region had seen a total of 389 office, industrial, retail and multifamily deals completed year-to-date, with a dollar volume topping $1.06 billion.
That was off from the approximately 575 total deals completed in the first quarter of 2017, at a volume of more than $1.12 billion.
Still, a recent national survey of investors by CBRE Group Inc. found San Diego ranked at No. 11 among major American metro markets being targeted for future investment across all property segments. San Diego moved up from its No. 17 ranking in the report a year ago.
Also, panelists at a March 29 San Diego conference presented by RENTV pointed to numerous signs of vitality in the local market. Those include continued strong employment trends, dropping vacancies, rising rents and extremely limited construction of new supply in all of the major categories.
These trends are particularly evident in West Coast office markets, said Doug Engelman, partner in investment firm TA Associates.
“The fundamentals are strong,” Engelman told an audience of more than 100 at San Diego Marriott La Jolla. “So when you talk to the money (people), the money is comfortable with the product, they’re comfortable with the cycle.”
While some markets, including San Diego, have taken longer to get where they are, capital remains plentiful from multiple sources; although it remains a challenge for some big investors to find office properties appropriate to their acquisition strategies.
“It’s a matter of trying to find deals that make sense for the bucket of capital that you represent,” Engelman said.
Panelists said there are some limitations and caveats for the local office market. For one, San Diego remains a predominantly suburban market, with its downtown doing well but still not enjoying the high demand for central downtown product among large corporate users seen in other West Coast markets like Seattle and Portland.
Another element to watch is how the technology sector fares locally and nationally in coming months and years. Currently, said Monday Properties Senior Vice President Carl Groner, high capital inflows into the technology sector have helped to make it the nation’s biggest driver of new office space absorption. If there is a retrenchment in venture-capital and other tech-related investments and valuations, there could be ripple negative real estate effects for tech-driven economies including San Diego’s.
For now, there are signs that current strong fundamentals can be maintained. Panelist Brad Tecca, executive director in the San Diego office of Cushman & Wakefield, noted that space absorption in late 2017 remained well above historical averages. The pace of federal interest rate hikes remains gradual, and in general, property investors are less leveraged and less panicked about retaining their holdings than was the case 10 years ago, when the Great Recession hit.
Apart from the local conference, brokerage firms in recent weeks have noted that San Diego County’s investment fundamentals remain historically strong across all the major property categories. The local industrial and multifamily segments showed the most momentum in the second half of 2017, which has generally continued in the early months of 2018, especially for industrial.
Commenting on San Diego’s rise in ranking in that firm’s national investor survey, CBRE Executive Vice President Louay Alsadek said many U.S. property investors are attracted to San Diego based on fundamentals including low vacancy rates, a diversified economy and a lack of development sites. Also, the region’s rate of new office and industrial construction deliveries is the lowest among major West Coast markets.
“Additionally, existing companies and new start-ups in our growth industries, such as life science and technology, have continued to increase their presence in the region, which has fueled net absorption and rent growth,” Alsadek said.
In its own recent San Diego investment report, Cushman & Wakefield said the region’s capital markets sector turned in an “above average” performance in 2017, with sales volume for properties priced $10 million and higher reaching $5.7 billion. Activity was bolstered in particular by a strong second half.
Jolanta Campion, Cushman & Wakefield’s San Diego research director, noted that the 2017 total lagged behind the region’s $6.7 billion transacted in 2016 and $6.6 billion in 2015. However, San Diego has now topped the 15-year annual average of $4.7 billion in deals for the last three consecutive years.
Cushman brokers said institutional capital shied away from suburban office investments during the early part of 2017, though Rick Reeder, an executive director with Cushman, noted institutional investors returned to the market in the second half of 2017 and the early weeks of 2018, lured by improving underlying fundamentals.
Joshua Ohl, senior market analyst with CoStar, said 2017 was a good year across all property types in San Diego, bucking national trends. By comparison, however, transaction activity during the first quarter of 2018 generally lagged behind year-ago levels in all categories except industrial.
As of March 30, CoStar data showed 82 local office deals closed year-to-date, totaling $297.3 million, down from the 91 deals totaling $390.8 million in the first quarter of 2017. There were 83 completed industrial deals totaling $325.7 million in the first three months, compared with $177.6 million generated by 107 transactions in the same period of 2017.
There were 119 retail property transactions year-to-date, totaling $220.1 million, compared with 217 deals worth $284.4 million a year ago. And in multifamily, there were 105 deals totaling $223.8 million – still strong, but down from 160 deals valued at approximately $272.8 million in the first quarter of 2017.
Generally, it’s much too soon to draw conclusions about the 2018 picture based on transaction volume. Ohl noted the first quarter generally has not been the strongest for San Diego in recent years, with much of last year’s local investment activity taking place during the second and third quarters.
Article By: Lou Hirsh, San Diego Market Reporter, CoStar Group
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