Many institutional investors, such as hedge funds and high yield bond funds, are looking for alternative investment opportunities and are increasingly investing in real estate, according to Asieh Mansour, a partner at Rreef.
As the head of research and a member of the Investment Committee at Rreef, a private real estate advisory firm based in San Francisco, she helped oversee the acquisition of $3 billion worth of real estate in 2004 nationwide.
Stable income yields and a lack of alternative investments with comparable relative returns have made the commercial real estate market the investment du jour for institutional investors, according to Mansour. So, where is the money flowing?
“San Diego is our number one target,” said Mansour.
She is not the only money manager with her eyes on San Diego.
At the Burnham-Moores ninth annual Real Estate Conference, held Jan. 25 at the University of San Diego, Mansour, along with Michael Robb, the executive vice president of Pacific Life, a Newport Beach-based direct mortgage lender, and John Turner, the vice president of leasing at the Irvine Co., also based in Newport Beach, discussed the current real estate investment environment.
The panelists, and a moderator, Dan Phalen, the president and chief executive officer of Pacific Southwest Realty Services in San Diego, exchanged ideas about capital markets’ effects on commercial real estate and the relative strength of the San Diego market.
All four participants agreed that San Diego stands to gain from interest rates, which are at historic lows, and from the fact that the sheer volume of capital investment flowing into commercial real estate is at historic highs.
Mansour said that Rreef is bullish on San Diego because this market is characterized by what it considers “growth drivers,” such as the high-tech and biotech sectors the key industries that will shape U.S. economic growth.
Avoiding Retail Property
In San Diego, Rreef, which owns the 648,000-square-foot San Diego Tech Center in Sorrento Mesa, has been buying industrial and office property and, according to Mansour, avoiding local retail property because it is overpriced.
“We’ve taken the biggest land-use bets in the office market Downtown,” she said.
Irvine Co.’s Turner shares Mansour’s enthusiasm for San Diego’s office and industrial product.
“Because we like to be in a supply constrained market, we like San Diego,” he said. “This is part of our (modus operandi), and the other is to hold forever.”
“Mission Valley and Downtown are shining stars” in this market, said Phalen.
But Downtown is not without risks, he added. The last large, Class A office building constructed was One America Plaza in 1991. This means many of the buildings Downtown are aging rapidly, and operating costs to run them are also increasing, according to Phalen.
While San Diego withered during the stock market-induced recession of 2001, “San Diego was not hit as badly as other techie markets,” such as Dallas and Denver, Mansour added.
Robb said the dominant trend in San Diego’s Downtown office market will be urban renewal: “This region was built in the ’60s and rebuilt in the ’80s, so I don’t think you (will) see it rebuilt again,” he said. Rather, he predicts that a substantial amount of redevelopment is on the horizon.
Phalen agreed. “We are seeing a substantial amount of redevelopment. Many buyers are buying property, not for what’s there but for what they can do with it down the road. So I think we’ll see a lot more re-utilization of real estate in a different manner, shape or form,” he said.
Although risks of the market overheating , as interest rates increase, many debtors could face difficulties in repaying their loans , abound, the panel agreed that San Diego’s office and industrial property market is an attractive investment.
