Rental-Home Realities Likely to Reshape Some of the Market

Pokémon Go” demonstrated that augmented reality (AR) can motivate people to actually get out and visit locations, even properties they had not planned in advance to visit. Since real estate, both residential and commercial, relies upon the consumer experiencing a property — almost always in a site visit — before committing to a transaction, stimulating such a visit by a technological lure can be extremely powerful.

“The new American dream involves a home, but it doesn’t necessarily involve the ownership of the home,” said Mitch Roschelle, a partner in the consulting firm PwC, during a recent forum presented by the University of San Diego’s Burnham-Moores Center for Real Estate.

Roschelle is a business development leader and often-quoted national expert in the New York office of PwC (formerly PriceWaterhouseCoopers), which teams annually with the Urban Land Institute (ULI) to produce a report and national ranking called Emerging Trends in Real Estate, focused on the commercial sector.

San Diego continues to rank among the nation’s top 30 investment markets — placing 23rd among 78 “Markets to Watch” in the 2017 edition, though it slid from 16th in the 2016 report.

Roschelle’s national observations at the USD forum were especially cogent for those who follow the hot local apartment market, which for the past two years has seen a rapid acceleration in property sales and rents (good for investors, obviously less so for consumers), as the rate of production for all types of housing lags far behind demand.

The top five markets in this year’s edition were Austin, Dallas, Portland, Ore., Seattle and Los Angeles. That ranking takes in all commercial categories, including office, industrial, retail, hotel and multifamily (mostly apartments in the current market).

Multifamily Still Strong

While it slid in overall rankings — based on job growth, development and other supply-and-demand variables gauged in investor surveys supplemented by PwC research — San Diego’s multifamily market is still held in high regard by U.S. investors.

According to PwC and ULI, 53 percent of nationwide respondents deemed San Diego multifamily a “Buy,” while 39 percent rated it “Hold” and 11 percent rated it “Sell.” That “Buy” contingent was the third-largest among the top 20 markets, after only San Antonio and Fort Lauderdale, Fla.

Investors are generally less rabid about other types of local real estate, though the office sector still placed 10th among U.S. markets for “Buy” sentiment (34 percent); retail placed 12th (35 percent); and hotels placed 19th (8 percent; the category nationally is seen primarily as a “Hold”). San Diego’s industrial market did not place among the Top 20 for “Buy” sentiment, likely because there are limited existing properties available for sale, though development activity has recently picked up considerably.

Goodbye, Ownership; Hello, Rental

Roschelle noted that markets with high job growth and a supply crunch for rental housing — such as San Diego — will likely continue to be strong for investors for the foreseeable future. Apartment demand is rising among nearly all demographic contingents, including boomers, retirees and the fast-growing millennials.

But production of new units is slowed by factors including limited land availability, rising production and labor costs, development fees and restrictive city codes that can delay or scuttle projects.

Even as millennials age and raise families, heading for the suburbs as the boomers did, Roschelle said pricing and other factors are encouraging more of them to rent rather than buy in order to get the “home” experience. That will impact the size and configurations of rental offerings going forward, with the potential for more rental and “rent to own” programs within single-family projects.

“People have to disaggregate home living from home ownership,” Roschelle said.

Other Jobs Tag Along With Tech

Among other San Diego-centric observations, the 2017 Emerging Trends in Real Estate report said the local region’s commercial real estate is benefiting from job growth in the technology industry — led by data science, military IT, biotech, medical devices and software.

“The majority of the tech influence is showing up in employment growth in professional and business services and the health services sector of the economy,” said researchers at PwC and ULI, which partner on the annual U.S. real estate report and ranking. “The concentration of jobs in higher-paying industries is putting upward pressure on wages as the local labor market tightens.”

Despite one of the highest costs of living in the U.S., San Diego has a “good demographic outlook” for 2017. Population and household growth are projected to be above the national average.

“Housing is expensive in San Diego, but strong employment and income growth should drive demand for it,” the report said. “To meet this need, construction permits and starts are projected to rise in the coming year.”

Researchers noted that San Diego is also among cities getting good marks from the corporate world for downtown elements that serve their “triple bottom line” of financial, social and environmental success. San Diego is listed among cities such as Cleveland, Oakland and Raleigh, N.C., which have recently been adding live/work/play elements to their urban cores that help attract talent to local companies.

Health Care Keeping Deal Flow Healthy

For anyone who doubted whether the health care industry has a tangible impact on local commercial real estate trends, the deal patterns of 2016 should erase most of those doubts.

A look at San Diego County’s top 40 office leasing deals of 2016 — as reported by CoStar Group — shows that more than a quarter of those transactions, 11 out of 40, had some connection to the world of health, fitness and medicine.

The year’s biggest local deal by square footage involved medical device maker Becton, Dickinson & Co.’s leasing of 318,000 square feet at Pacific Corporate Center in Sorrento Mesa; the same company leased 93,000 square feet at another Sorrento Mesa site, which was the region’s fourth-largest leasing of the year.

The local Top 5 deals for 2016 also included biotech firm DexCom Inc.’s leasing of 132,600 square feet in Sorrento Mesa (No. 3); and Scripps Health’s leasing of nearly 90,000 square feet at the former Petco headquarters in Mira Mesa (No. 5).

Also, CoStar noted that the biggest industrial property purchase deal of the year was Alexandria Real Estate Equities Inc.’s $182.5 million purchase of Torrey Ridge Science Center, in La Jolla’s Torrey Pines biotech hub.

Affordable Apartment Project in the Works in Oceanside

Carlsbad-based Chelsea Investment Corp. recently announced plans for Villa Storia, a $12 million, 38-unit affordable housing community in Oceanside.

A statement from Chelsea said the development will be built within a larger master-planned, single-family community by Northern California-based homebuilder Integral Communities. The Encinitas regional office of Integral donated the land and is making a “substantial monetary contribution” for the Chelsea project.

Officials said Villa Storia will be built as the inclusionary-housing element within the 35.5-acre Mission Lane community, adjacent to Mission San Luis Rey off Mission Avenue. It is the first inclusionary project in Oceanside under an ordinance requiring projects of three or more homes to reserve at least 10 percent of units for low- to moderate-income families, or their developers can instead pay a fee.

Villa Storia’s one-, two- and three-bedroom units will be made available to families earning 50 percent to 60 percent of the county’s median income. Construction is underway, with leasing to begin this summer and move-ins anticipated this fall.

Chelsea Investment Corp., led by founder and CEO Jim Schmid, has completed several affordable housing developments in the local market.