Prices being paid for some San Diego County commercial real estate began leveling off in late 1998 and appear to be holding steady, statistics and conversations with brokers and agents indicate.
While the prices buyers are willing to pay for apartments and offices has continued to rise, the average price per square foot countywide of retail and industrial real estate has declined slightly so far this year compared to last year. That’s according to information from Comps.Com, a San Diego-based real estate statistical reporting company.
However, the statistical picture is complicated by the fact that no two pieces of real estate are alike, and as a result certain statistical anomalies occur, real estate agents claim. Other issues clouding the picture include buyers who are willing to pay a higher price because they want a particular location, and the varying rental rates from one property to another that affect sales prices.
However, in larger retail properties, some experts believe in some cases changes in average prices paid year-to-year were affected by large purchases of first-class properties in 1998.
That is what happened with shopping center properties, according to Dave O’Rell, research manager at Grubb & Ellis, a national commercial real estate brokerage with offices in La Jolla.
& #711; Sale Prices Of
“Last year was the year Westfield America bought many of the major malls here, and the sales prices of malls are higher per square foot than the strip shopping centers,” O’Rell said. “A lot of the trophy properties, such as Horton Plaza, changed hands last year.”
Prices of retail properties have been rising since 1995. That was the year the average price per square foot paid in the county was $80.66. So far this year, the average price paid per square foot for this type of property has been $99.95, down from $136.16 in 1998.
Larry Bogle, first vice president at Retail Property Group, a real estate brokerage in La Jolla, said prices of retail property in the county are very location-sensitive, with shopping centers north of Interstate 8 selling for more than those south of the freeway. The high purchase prices paid by real estate investment trusts last year for strip shopping centers also affect prices, he added.
“The REITs picked off all the large food- and drug store-anchored centers in 1997 and 1998 and they were buying them at much higher prices and for all cash,” he said.
That changed when the Federal Reserve urged lenders to reduce the unsecured credit lines that the REITs were using to buy properties, instead of getting mortgage financing, he said.
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The price of smaller shopping centers, those priced from $1 million to $3 million, are still going up in some areas.
Bogle attributed this to investors cashing out of the stock market and moving their money into more stable real estate investments.
“People are also selling apartments and exchanging into small shopping centers,” he said.
For industrial properties, San Diego County prices have declined slightly from last year, according to Comps.Com. Last year, the average price paid per square foot was $77.98. That compares with 1999’s year-to-date price of $76.33 , not much of a change, according to Steve Willhite, a senior vice president and industrial property specialist at Grubb & Ellis in San Diego.
“My intuitive feeling is the lack of new product and the increase in demand will continue to push rents and sales prices up,” Willhite said. “There are no new, centrally located industrial parks coming on line, so if you are an industrial tenant today, you would have to look at Poway or North County, or in Otay Mesa.”
He attributed the rising rental and sales prices the past several years to a shortage of land zoned for industrial purposes. That is due in part to the conversion of some industrial land to residential purposes, he said.
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Will Keep Rising
That is the case at Stonecrest in Kearny Mesa, at Torrey Hills in Sorrento Valley, and in the Wateridge development in Sorrento Mesa, he said.
O’Rell of Grubb & Ellis said declining vacancies in apartment properties, plus the fact that most of the new units being built are luxury units, will ensure that apartment prices will keep rising.
“Because of the tight vacancy rate, rents are going up,” he said. “Rental rate growth, even in the cheaper units, is improving. The fundamentals for investing are very sound because of the low vacancies.”
The average sale price per square foot for office properties has risen from $78 per square foot in 1995 to $124 so far this year. Last year the average price paid per square foot was $120.
“A lot of the price of an office building depends on its location,” O’Rell said. “Certain submarkets, such as Del Mar Heights, have less than 2 percent vacancy, whereas in Carlsbad or Rancho Bernardo the vacancy rates are close to 15 to 20 percent.”
Chuck Wasker, senior vice president of IPC Commercial Real Estate of San Diego, who deals with investors in all types of commercial real estate who are looking to buy in San Diego County, doesn’t see the statistics as an indication that the market has peaked here.
& #711; ‘We May
“I don’t think we’ve necessarily peaked, we may have plateaued,” Wasker said. “Apartments and offices will continue to go up in certain areas as new buyers are able to get out the old tenants and lease to new tenants. A lot of leases that were done four to five years ago have now expired and the properties are being brought up to the market rents.”
The statistics from Comps.Com and anecdotal evidence from the brokers agree: Buyers in San Diego County are willing to pay more for cash flow from the properties this year than in the mid-1990s.
Value in commercial real estate is determined by the net cash flow from a property or capitalization rate, the brokers said. The capitalization rate is the purchase price of a property divided by the net cash flow.
Four years ago, while the county was still mired in a real estate recession, buyers were only willing to buy properties with an average capitalization rate of 10 percent, the Comps.Com statistics show, or about 10 times the cash flow. Now, buyers are willing to buy at a capitalization rate of between 9.3 percent and 8.2 percent. That means buyers are willing to pay from 10.75 times to 12.2 times the annual income from a property, the real estate professionals said.