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Caution Is Creeping Into the Commercial Real Estate Sector

Few things are certain in commercial real estate investing, including how long the United States will remain the calm center of what has recently been a volatile global economy.

Experts at a recent local forum presented by the Urban Land Institute pegged the current U.S. post-recession recovery as somewhere around the middle of the seventh inning, possibly heading into the eighth inning.

“The question is, are we actually playing a double-header?” said Don Ankeny, president and CEO of San Diego-based Westcore Properties. That question is among several that keeps his company cautious in its office and industrial investment strategy, and selective in its new development projects in places such as Southern California, San Francisco and Silicon Valley.

San Diego has recently been among several U.S. markets benefiting from an influx of domestic as well as international money being placed into commercial real estate, as investors seek relative stability in a world where oil prices have crashed, stock markets are reeling, and China’s growth has slowed to a crawl compared with just five years ago.

At the same time, consumer spending and wage growth remain flat in the U.S., even as the number of new jobs has been increasing locally and nationally.

Volatility Here to Stay

“Volatility is here to stay for some time,” said Leonardo Simpser, managing director of LLJ Venture and LM Advisors, heading San Diego-based parent LM Group’s commercial real estate platform.

His company is finding opportunities in the U.S. and a select few other countries, such as Spain, but Simpser said the market generally remains nervous about the still-shaky economies of nations such as Venezuela, Brazil and Japan. For now, that helps domestic investment retain its “safe haven” status, though there are early signs of a pullback among major investors in areas such as hotel finance as prices paid for properties begin to level off.

Lynn LaChapelle, managing director in the San Diego office of real estate services company JLL, said there are emerging signs in the market of a pullback in investments among some pension funds and other entities with a shorter-term investment strategy.

Some of the pullback stems from expectations of rising finance rates and declining or moderating property prices, which can cut into investment returns. According to Bloomberg News, those factors recently prompted analysts at Morgan Stanley to predict that U.S. commercial real estate prices would essentially stay flat in 2016, revising a prior forecast calling for 5 percent growth in the coming year.

A late 2015 forecast report by JLL noted that U.S. commercial investment sales totaled $463.6 billion in fiscal 2015, up 25 percent from the prior year. The forecast for fiscal 2016 called for $510 billion in investment, which would be a 10 percent year-over-year increase.

Staying the Course

Some companies that were already sector-focused are staying the course. Dan Ryan, executive vice president in the San Diego office of Alexandria Real Estate Equities Inc., which is focused on life-science properties, said the Pasadena-headquartered company’s portfolio continues to reflect growth trends in biotech and related technologies.

Alexandria, like other real estate investment trusts, is increasingly teaming up with pension funds and other institutional entities looking to put their money into existing buildings and new development projects. Ryan said Alexandria, already among the largest life science property owners in the local market, has about 1 million square feet of projects under construction in San Diego, with another 1 million square feet in the development pipeline.

Marney Cox, chief economist for the San Diego Association of Governments, said evolving technologies and demographic shifts will play a big role in shaping real estate demand and development trends in coming years.

Self-driving cars, for instance, provide an opportunity to use roadways more efficiently and reduce congestion and pollution. The same results are likely to come from building higher-density, public-transit-accessible multifamily projects near work hubs, though public sentiment in many local neighborhoods remains in opposition to higher-density development.

In fact, U.S. auto sales have recently been booming, thanks in part to cheap financing. “The question is whether consumer behaviors will change,” Cox said.

San Diego County’s current commercial real estate investment market has generally received favorable reviews by firms that track nationwide trends. San Diego recently placed 11th in the latest annual national ranking of 46 U.S. office investment markets by brokerage company Marcus & Millichap, slipping three notches from a year ago.

That firm’s ranking, intended as a guide for nationwide investors, tracks factors including job growth, vacancy and rent trends, and new construction.

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