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Commercial Market Seen as Solid Through 2017

Demand for commercial real estate space — including development, leasing and investing — is expected to stay on the increase in San Diego and most other California markets through 2017, spurred by factors including continued job growth.

That’s the outlook contained in a recent survey released by the law firm Allen Matkins and the UCLA Anderson Forecast, analyzing the prospects for commercial real estate development activity over the next three years.

Researchers said developers in the San Diego, Orange County and Los Angeles markets view 2016 and 2017 in positive terms, and expect Southern California office markets to improve in rental and occupancy rates. Still, developers in all three markets remain cautious about new office construction, as demand catches up with a surplus of available supply.

Fewer than 30 percent of statewide survey respondents indicated they plan to develop new office space by mid-2015. In contrast, 70 percent planned to begin one or more industrial space projects in the coming 12 months, an indicator of rising sales, production and shipment of goods in an improving economy.

The general climate is encouraging optimistic investors to take money off the sidelines, to either invest in new development or compete with a rising number of other buyers for existing properties, while financing conditions — including low interest rates — remain favorable.

“There is an appetite out there to invest in commercial real estate,” said Martin Togni, a partner and real estate services director in the San Diego office of Allen Matkins.

Office Developers Pondering Plans

Currently, new construction in office and industrial markets remains rare in San Diego County. However, several developers, including Hines, Irvine Co. and Kilroy Realty Corp., have said publicly in recent months that they are mulling new development in their existing San Diego office campuses, primarily in high-demand neighborhoods such as Del Mar Heights, Carmel Valley and University Towne Center.

The hottest local development sector remains the apartment category, Togni said, and that will likely remain the case for the foreseeable future. Trends are evidenced by continued high demand and construction of new apartments in downtown San Diego.

Downtown is drawing a still-strong contingent of millennial-age residents seeking to live in urban areas close to public transit and plenty of entertainment and social amenities. The preferences of younger workers are also impacting office space demand and campus amenity upgrades in Torrey Pines and other life-science and technology-oriented submarkets.

“The optimism about 2017 in the surveys, broad-based across all markets, is an important indicator of both the probability of new additions to stock being started over the next two years and of opportunities for new investment in multifamily, office and industrial space,” UCLA Anderson Forecast economist Jerry Nickelsburg said in a statement related to the latest report.

Consistent Commercial Findings

The Allen Matkins/UCLA findings are in line with those of commercial brokerage companies that track San Diego County’s supply and demand.

According to Colliers International, proposed new local development in the industrial sector totals nearly 10 million square feet, even though no new construction was completed in second quarter 2014. Colliers researchers said that as the market continues to improve, the region “will likely see more new build-to-suit and even speculative construction” break ground in the second half of 2014 and through 2015.

In the apartment sector, San Diego County is expected to see 4,500 new units completed by the end of 2014, well ahead of the 1,400 completions recorded in 2013, brokerage company Marcus & Millichap reported.

Even with the new product being added, the local apartment vacancy rate will still be at a low 4 percent, among the tightest in the nation for major metro markets. Rents will grow this year at an annual rate of 3.5 percent, slightly below the 3.8 percent growth of a year ago, the brokerage company said.


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