By PAT BRODERICK
Why isn’t a strong housing market causing a robust commercial real estate market in San Diego?
That was the question for the San Diego Building Owners & Managers Association when it recently produced its annual commercial real estate market update earlier this month.
In fact, desperate house hunters, risky financing and a stagnating office market have San Diego’s real estate experts fastening their seat belts for what could be a bumpy ride.
Several factors are converging: At a recent conference in San Francisco,a major confab of builders, land developers and architects,panelists discussed the turbulent condo market, with speculators running amok.
Harvard University’s Joint Center for Housing Studies recently released its report on the nation’s housing market, warning of eager homebuyers willing to take on so-called creative,but often risky,financing to qualify for sky-high priced homes.
Yet San Diego-based DataQuick Information Services recently reported that the county’s annual appreciation rate for housing dipped under 10% for the first time in almost six years.
All the while, San Diego’s business interests continue to fret over the impact of the housing market on the city’s office, industrial and retail markets, with an exodus of companies and consumers who are seeking a more affordable way of life.
“The conventional wisdom is that we are at a peak of some kind,” said Tim Sullivan, president of the Sullivan Group Real Estate Advisors. “There is certainly agreement that change is ahead, interest rates will go up, although we don’t know when or how high, and we need to be prepared. We’re starting to see appreciation slow, which is a good thing if you’re trying to buy, bad if you’re an owner. But appreciation was getting to the point that we needed to moderate that.”
No one seems to be able to agree on what’s ahead, he said.
“For the first time, we have this convergence of events, and some say, ‘We are bulletproof,'” Sullivan said. “But another school of thought says we are headed for a dive. Home prices are too high, the affordability ratios stink, and interest rates are going up. I take the middle ground.”
His reason for optimism: solid job, population and income growth, and the transfer of wealth from one generation to the next, Sullivan said.
Builders and business advocates continue to be frustrated by the county’s lack of affordable housing and industrial space and its impact on retaining and attracting new companies.
Commercial Challenges
Despite reports of a healthy, robust local economy, San Diego got some gloomy news earlier this month when six companies with San Diego operations announced cuts of about 1,000 jobs.
The reason: greater operating efficiency at less-costly sites.
Sullivan agreed that the residential and commercial markets are interdependent, for better or worse.
“We are so heavily taxed,” he said. “It’s an expensive state to do business. How do we attract business and keep the ones we have? The commercial and residential markets are tied together symbiotically. If people can’t afford to live here, no one will need office space. I think the commercial market will be challenged with that.”
Sullivan remains optimistic.
“Overall, I feel good about this year,” he said. “I worry about the summer of 2006 and 2007.”
Jeb Bakke, a senior vice president for Los Angeles-based CB Richard Ellis Group Inc.’s San Diego office, is bullish for the most part. Bakke was a panelist June 14 at the San Diego Building Owners & Managers Association’s commercial real estate market update.
“We had a lackluster first quarter,” he said, but predicted “massive tenant demand and activity, resulting in better statistics at year’s end, with lower vacancies, higher rents, and the pressure on a tight supply of future office development.
“It will be challenging for the tenant, but it has been a tenant’s market for the last couple of years, and now it’s more of an owner’s market,” he said.
Bakke said he’s not worried about a waning commercial office market.
“Defense contracting, financial services, medical, software, high-tech, and R & D;,they are still doing well and needing space,” he said. “San Diego is a city of entrepreneurs.”
Cautiously optimistic about the commercial market is Andy LaDow, a senior commercial real estate broker and partner at Grubb & Ellis/BRE Commercial in San Diego. LaDow also was a panelist at the BOMA event.
LaDow said San Diego’s downtown office market has been tough during the past year or so, and it will be throughout this year.
“Some companies are moving downtown,architectural and design firms, engineering,but not in the traditional downtown high-rises. They buy a loft and fix it up. There is a huge demand for owner/user, but for smaller buildings.”
LaDow said residential development will bring long-term stability to the office market, which, he added, has been hamstrung by the expensive cost of parking.
“For office markets to be stable, they will need a residential component nearby,” he said. “With the traffic issue, the reality is that a lot of people live in East County, South Bay, Point Loma, and they don’t want to work in Sorrento Valley or Del Mar Heights.”
With Mission Valley’s office markets filling up quickly, LaDow said downtown San Diego should benefit from the overflow.
“Downtown will get a lot of attention, because there are large blocks of space down there,” he said. “It will help in the recovery of downtown, getting more companies to consider moving there, realizing that, ‘Hey, the deals are pretty good downtown.'”
Broderick is a staff reporter with the San Diego Business Journal.
