SAN DIEGO—San Diego remains an extremely attractive investment market partly because there is slightly less institutional money flowing through the region than there is through its neighboring markets, SR Commercial's co-founders and principals CJ Stos and Adam Robinson tell GlobeSt.com. The firm, a privately held, full-service commercial real estate investment company that partners with both high-net-worth private capital and institutional investors, has invested significantly in San Diego and continues to be bullish on the market. We spoke exclusively with Stos and Robinson about why they like San Diego and what we can expect from this market in 2016.

GlobeSt.com: SR Commercial has been dubbed one of the most active buyers in San Diego. What is attractive about the San Diego market, and what can we expect from this market in 2016?

Stos: We are San Diegans at heart. We love the area—it offers an eclectic feel with a strong live/work/play vibe. With regard to commercial real estate, San Diego is an extremely attractive market for several different reasons. One major reason is that there is slightly less institutional money flowing through the region, which leads to higher returns and yields than other nearby markets, such as Orange County and Los Angeles.

Robinson: San Diego also has a very diverse economy. Decision makers are drawn to the area's live/work/play environment, which CJ mentioned.

In general, there are many different revenue streams and brands throughout the region that are thriving. Many of the local brands are not large, well-known corporate brands. Rather, they are smaller, boutique brands. 

San Diego is mostly made up of homegrown companies. Because of this, it takes a strong understanding of the local market to be successful here. That's why we always say that our local expertise is a key differentiator for us, and it gives us a competitive advantage over the competition. Based on our local knowledge, we are able to execute quickly and make fast decisions in terms of both acquisitions and lease-ups.

Stos: As for 2016, prices are continuing to rise across all real estate sectors. We believe that this trend, coupled with the limited supply of developable land left in San Diego, will contribute to a strong push toward redevelopment in 2016.

GlobeSt.com: What attributes or market fundamentals does your firm look for when acquiring assets in the current market?

Robinson: Replacement costs are a significant factor when determining whether or not an asset makes sense in the current market. As prices continue to rise, we want to ensure that we are still bringing value to each and every asset. Therefore, low replacement costs are a vital part of our overall decision.

Stos: At this point in the cycle, it is essential that investors are making decisions with the future in mind. We know that all markets are cyclical. That is something we keep top of mind in all of our investment decisions.

Currently we are extremely focused on reinvesting in class-A, top quality product in excellent locations. We're looking for opportunities with high-quality amenities in top markets that are sustainable through future cycles.

Based on that strategy, investment deals should be arranged with low leverage and with reserve capital on hand. In many of our deals, we are implementing improvements now that will position our long-term assets through future market cycles.

GlobeSt.com: Since your firm tends to focus on industrial properties, what trends are underway that might impact this product type in 2016?

Robinson: One relatively new trend emerging in the industrial sector is the way that big-box retailers are utilizing space. Many of these retailers are beginning to occupy smaller fulfillment centers in various locations, as opposed to occupying a traditional, large-scale distribution center. 

We expect to see more of this activity in 2016.  Rather than one large distribution center servicing all of the surrounding areas, retailers will likely continue to increase their number of smaller centers spread throughout a region.

Stos: A second trend and one on which we are extensively focused is the push toward creative industrial spaces. We've all heard of creative office, but we are beginning to see this shift into industrial product as well.

By integrating unique, forward-thinking amenities to create more cutting-edge industrial properties, we are finding that our assets are in high demand among tenants and that we are able to lease much more quickly, and for a premium price.

GlobeSt.com: What plans does your company have for the future, and what is your investment strategy moving forward?

Robinson: We are continuing to reinvest in class-A, high-quality assets in top markets, and we are also beginning to increase our focus on ground-up construction.

We are currently in the process of developing two new projects, which we anticipate will break ground in early 2016. We have reached a point in the cycle where prices have reached an all-time high, but lease rates have not yet quite peaked. We plan to approach our assets with the long-term vision in mind, focusing on ground-up construction and attracting and retaining high-quality, long-term tenants.

Stos: We will still invest in a value-add asset, but it will have to be located in a top market or have other attributes that make it a worthwhile investment in order to sustain future market cycles. The market is hot right now, but we know that there will come a time when we will see a shift in the market, and we will do all that we can to be prepared for that.