Renovations, Conversions Span All Sectors

King: “Downtown San Diego’s office inventory at roughly 13 million square feet will be a key player to captivate a significant portion of the market share for these users.”

SAN DIEGO—With land scarce and at a premium, adaptive re-use and renovations continue to be the name of the game in San Diego’s commercial real estate sector, Voit Real Estate Services ‘ VP Ryan King tells GlobeSt.com. After the firm’s Q1 report for the region showed leasing strength in all sectors, we spoke exclusively with King about the market’s decreasing office and retail availability and rising industrial rental rates, as well as his overall view of the market. GlobeSt.com: With office and retail availability lowering in San Diego, what is the next expected step these sectors will take? King: Both the office and retail sectors have seen steady growth and a solid start to 2016. Each has posted positive net absorption and strong transaction volume. In office, the trend towards creative and collaborative work environments and outright conversion, evidenced by the 230,000-square-foot Atlas project in Carlsbad currently being converted from industrial to office (estimated completion this July) will continue. Other unique projects such as the Yard , located in Sorrento Mesa, and make , located in Carlsbad, are further examples of this hot trend. Expect to see more projects like this with roll-up doors, large open spaces, ping-pong tables and exposed ceilings as the war for top talent marches on. A lot of companies that have traditionally been higher-paying office users are trending away from the shiny glass class-A corporate feel and searching for something unique and different, creating a “lifestyle” experience. In retail, renovations of existing projects will continue at a high level, including the completion of Phase I of the $1 billion expansion of Westfield UTC , which will host best-in-class amenities and restaurants. Demand remains very high in the key desirable submarkets, so expect to see more strategic improvements to attract the top new concepts and compete aggressively for the best national retailers. To put it simply, in retail people are tired of the “same old same old,” as evidenced by former household names Radio Shack, Sports Authority , and Home Town Buffet shutting down stores. In today’s world, it is all about new local concepts, with farm-to-table eateries and juice concepts leading the way and a big influence on convenience. Smartphones, food-delivery apps like Postmates and Amazon Prime will also continue to have a significant impact on the retail world. E-commerce is here to stay and having an increasing impact on all sectors of commercial real estate. Customers are comfortable “showcasing” a product in a retail store, but immediately purchasing it on their smartphone from an online retailer. One of the big questions is how to keep that customer’s money in the brick-and-mortar store. GlobeSt.com: How are tenants reacting to San Diego’s rising industrial rental rates? King: For 25 straight quarters net absorption has been positive, and vacancy countywide is 4.1%, one of the lowest levels in more than 15 years. The central-suburban submarket posted a vacancy rate of a mere 1.95%. Since 2010, there has been more than 10 million square feet of positive absorption. In return, average asking NNN lease rate has increased at 14% over the last year. The development pipeline has been limited, pushing vacancies down and lease rates up for this product. As a result, tenants are being forced to look seriously at submarkets they might not have initially wanted to consider. Industrial properties are also seeing unique uses that might have been overlooked in previous years with new ideas like trampoline centers, athletic training facilities and action-sports centers becoming more of the norm. It has effectively become a landlord’s market, and tenants lack leverage, especially on renewals. Tenants are willing to pay increased lease rates for buildings with the latest improvements, including ESFR sprinklers, increased clear height, attractive low-maintenance landscaping and a creative-office environment. Prior to the recent increases, lease rates had not seen any upward movement; however, the vacancy rates mentioned above allowed landlords to push rents. This rent growth is fueling the construction , while limited, that we’re seeing today. GlobeSt.com: What else do you find interesting about this market report? King: As markets tighten and the competition becomes fiercer, landlords must continually become more creative. This applies to all market sectors and product types. Amenities, creative uses, unique ideas, and lifestyle opportunities will be the key differentiators that will dictate success for landlords. The Millennial generation likes urban spaces with high-quality environments. Downtown San Diego’s office inventory at roughly 13 million square feet will be a key player to captivate a significant portion of the market share for these users. There is a wave of new residential being delivered with almost 6,000 units coming online in the next five years. That is a lot of jobs that must be offered to provide a workplace for these new Downtown residents. Be on the lookout for Downtown’s vacancy to inch below 15% in the upcoming months as more people migrate south to the live/work/play environment of Downtown.  The national trend of “suburban-to-urban” is real. GlobeSt.com: What else should our readers be aware of about the San Diego CRE market in general? King: As this cycle continues to mature and cap rates continue to compress, we are seeing an influx of off-market deals in the $2-million-to-$20-million range that will only increase. We currently have over $30 million in off-market transactions in escrow since owners are receiving excellent pricing and feel that the disposition timing aligns with their investment objectives. This is a trend that will continue as investors approach ownerships directly, with returns becoming more and more difficult to find and demand remaining robust. San Diego CRE is in a solid recovery phase with some creative trends leading the way.   Are You In The Know?  Join us  at RealShare SAN DIEGO on May 17 for impactful information from the leaders in San Diego CRE. Learn more .