In 2015, new job creation in San Diego’s high-paying industries, including technology and life sciences, continued to fuel demand for commercial real estate. This played out, for instance, in rising demand for apartments, along with worker-friendly amenities being added at new and old office campuses, and the trends show few signs of slowing down in 2016.
Apartments continue to be the hottest sector within commercial real estate locally, driven by an improving economy that is encouraging young workers in particular to establish new households or break free from roommate situations. Combined with other consumers unable to break into the single-family housing market due to rising prices, and the fact that new construction is not keeping pace with rising demand, landlords remain in the cat-bird’s seat.
Brokerage company Marcus & Millichap notes that the region’s apartment vacancy rate had ticked below 3 percent at the end of the third quarter, and the rate was expected to remain below the 2014 level at year’s end. In that kind of market, rents are likely to keep rising, and investors will continue to pay top dollar for existing apartment properties, as happened in 2015 in communities throughout San Diego County.
Office and Industrial Draw Interest
New office and industrial campus construction remains scarce, but existing older properties in the San Diego market drew plenty of interest from local and nationwide investors during the past year, and those buyers are investing heavily in renovations. The trend is being fueled by continued demand for workplaces — in technology, biotech and other industries — that offer workers quality-of-life amenities that include indoor-outdoor spaces, on-site fitness centers, and places to store their surfboards and hang their wetsuits.
Barring other major events that might spook the market, brokerage firms are not expecting the Federal Reserve’s recent 0.25 percent rise in interest rates to significantly alter current market conditions in the coming year.
“While the Fed is driven by data, I think this signifies its belief that the economy can operate in an environment with a normalizing monetary policy,” said Jeffrey Rinkov, CEO of Los Angeles-based Lee & Associates, which has operations in the San Diego region. “Relevant to real estate investment, long-term interest rates should remain at historical low levels, which will continue to incentivize investment.”
Spencer Levy, who heads Americas research at CBRE Group Inc., which has significant San Diego operations, noted that the high flow of capital funding now backing commercial acquisition deals nationally and locally — including money from international and domestic pension funds and other institutional investors — will likely outweigh potential increases in the cost of that financing.
Still, industry observers will be on the lookout in 2016 for factors including what happens with the price of oil, and whether China’s economy has a hard or soft landing.