[IMGCAP(1)]

SAN DIEGO—Wealth creation starts when people invent and introduce new products to the market, which leads to businesses moving into commercial space, San Diego-based Lee & Associates brokers Peter Merz and Daniel Knoke tell GlobeSt.com exclusively. They say a property owner once shared with them the wisdom that everything else flows from entrepreneurs and wealth creation.

"Entrepreneurial action creates jobs and ultimately the need for commercial real estate," Merz and Knoke say. "So, the demand for real estate is simply an indicator of the strength of the economy."

They also point out that San Diego County is composed mainly of smaller to mid-sized industrial and flex buildings. As a result, this market provides an excellent indicator of the overall economy because the entrepreneurs who create the new products and services move out of their garage into incubator space and then into larger spaces. "Clearly, we see this in examples such as Qualcomm, Stone Brewing Co. and the life-sciences sector, where companies start small then grow exponentially, taking down increasingly larger blocks of vacant space. "  

Merz's and Knoke's observations in the field agree with the current statistics. "All indicators demonstrate a very strong market. Consider the following chart that summarize industrial and flex buildings in San Diego County:

[IMGCAP(2)]                                          

The upswing of rental rates has fueled the demand in investment sales, the two say. "For example, a multi-tenant property was recently listed, received multiple offers and closed escrow to an investor approximately four months after it presented to the market. Shortly after closing escrow, the new buyer completed its first lease to a new tenant at a rate that was 11% above the projected pro-forma rents in the sales package. This rapid growth in rents was due to the decline in competing properties available for lease." 

Additionally, external data such as projections for population growth and the USD Leading Economic Indicators show strong and positive trends, Merz and Knoke say. "All off these markers seem to indicate that demand for space will continue to be very strong throughout 2016."

[IMGCAP(3)]

So what is one to do in this market? It depends on your situation, say Merz and Knoke. Following is their advice for the short term:

Tenants: Do not mess around and do not delay. With a tightening market, it is important to secure your space needs. A profitable company probably spends less than 8% of its revenue on rent. So, while it is important to save as much as possible through good negotiations, the highest priority is simply to secure the space you need before another tenant beats you to it. Merz and Knoke say they are now seeing multiple offers and tours on the shrinking San Diego inventory.  

Owners/Users: If you were unfortunate to buy in the boom years only to find yourself later "underwater" on your building, there is now hope. Sale prices are approaching their high points from 2006 to 2007, but are not quite there yet. If you are in a position to sell, 2016 would be a good year to do so. The recent increase in prime rates by banks should not deter buyers in the short term, but additional increases could affect sale prices.  

Investors/Landlords: Consult with your broker to find the rates where competitive properties are leasing. You may be pleasantly surprised at your ability to raise rents since your tenants have few or no other options. Also, it may be a good time to consider selling. If you purchased in the boom years when rental rates and sale prices were high, you may now be able to reposition and sell your building.  

The two conclude, "Regardless of the short term turmoil from election-year politics, interest rates and oil prices, we still see a strong market for industrial/flex space through 2016."