San Diego saw a surge in investment activity in the second half of 2017. Office investment sales reached record highs since 2H17, and industrial sales were the highest since 2003, according to a new capital markets report from CBRE. Multifamily sales were still strong in the final two quarters of the year, however, didn't hit the peak volumes that the office and industrial sectors saw. As a result of the activity, commercial asset values hit a record high as well of $271 per square foot. All asset classes saw increases in values. Office properties traded for an average $319 per square foot; industrial properties hit $194 per square foot; and multifamily prices increased to $268 per square foot. To find out more about the investment activity in San Diego at the close of 2017, we sat down with market expert Scott Peterson, an SVP at CBRE.
GlobeSt.com: Why did the San Diego market see an increase in investment activity, especially for office product, in the second half of 2017?
Scott Peterson: At the beginning of last year and following the election, interest rates had jumped dramatically and there were a lot of questions about where the market is headed. The stock market had rallied, and investors were trying to determine if we had hit a peak again and if it was the right time to be buying. We saw a pull back in lending as a result of that as well. We had a lot of buyers waiting on the sidelines waiting to see how the tax plan would be resolved and what would happen to the 1031 exchange, property taxes and mortgage deduction levels. As the year progressed, a lot of those questions were resolved, and I think there was a mindset change in the market. There is a lot of positive momentum in the market and there is really nothing to set the market in the opposite direction. Overall, we haven't overbuilt office product, and you have seen a lot of value-add office acquisitions. The activity in the second half of the year really came from pent-up demand. Additionally, sellers felt more comfortable bringing product to market once the new tax plan was announced.
GlobeSt.com: What time of capital sources were active in the market in the second half of 2017?
Peterson: You have a pretty healthy mix of institutions and high net worth individuals. You really have to look product type by product type, but we have a really healthy attraction to all capital sources in San Diego.
GlobeSt.com: Is office a favored asset class in the market?
Peterson: Office is definitely a favored asset class. That being said, the market is bifurcated both by submarket and asset type and age. If you look at the assets that traded, it has been larger, class-A CBD product. There is definitely a better and higher interest level in the CBD markets versus your commodity, B-class office product. I would actually say that we saw a slow down in that product type, and you have seen cap rates rising for that product type over the last 18 months. That is because a lot of those properties are full with rents that have rolled past peak levels. A class-A office building in downtown, on the other hand, have seen cap rates stay flat or go down.
GlobeSt.com: What about industrial and multifamily?
Peterson: Multifamily is the darling of San Diego. Industrial has overcome multifamily as the darling nationally. San Diego is different because we don't have a lot of the big warehouse industrial projects that you see in L.A. County or in the Inland Empire. We have a lot of high-finished industrial and industrial flex properties, and sometimes it can be hard to determine if those are industrial or office buildings. We have seen a fair amount of development in Otay and Carlsbad, but you don't have a lot of industrial that trades.
GlobeSt.com: Office and industrial saw incredible increases in investment activity in the second half of the year, but multifamily didn't see the same surge. Why is that?
If you own a multifamily property in San Diego, it is gold, and it is tough to replace. Why would you sell it. That is really why there hasn't been as many multifamily sales. A lot of buyers here are executing value-add strategies and then holding for the long term. San Diego is a market that doesn't see a high trade volume, so it is hard to buy here. Because there are so few deals that do occur here on the multifamily side, they are very competitive when they do some to market. At the end of the day, it comes down to the lack of trades that we see here and the stability of San Diego. San Diego was very stable through the last downturn, and we haven't see a lot of building in the suburban markets. More than half of our development this cycle has been downtown. That really speaks to the fact that land in suburban markets is limited and expensive, and it is hard to build in San Diego. If you own a multifamily property in San Diego, you have to have a compelling reason to sell it.
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Kelsi Maree Borland
