Which Asset Classes Will Lead San Diego in 2019?

Industrial and office assets could be best positioned for a strong 2019, according to Lynn Reaser, Ph.D, CBE, chief economist and adjunct professor of economics at Point Loma Nazarene University. Reaser spoke at the economic forecast luncheon for CREW San Diego this week, held at University Club atop Symphony Towers. The economic outlook predicted stable economic growth in 2019, with GDP growth at 2.4%, 2% inflation, two more rate hikes and stock market gains of 8% or 9%.

In addition to the national overview, she also gave a more local San Diego outlook of specific asset classes. The office market will continue to see strong hiring and rent increases in 2019 with little speculative building, keeping the market in check. While growing competition from shared space providers and potentially flat absorption were concerns, she gave the office market a solid B for 2019. In San Diego, naval expansion, biotech, travel and entertainment will continue to drive the jobs market, and there will be 20,000 new jobs added this year. However, housing cost, labor supply and immigration will constrain the market.

Industrial, however, was the clear winner. Reaser said that demand from e-commerce and last mile distribution as well as life science, particularly in San Diego, is strong. While there is a large construction pipeline to pay attention to, with 1.4 million square feet planned in San Diego for 2019, she gave the asset class an A rating for 2019.

While industrial and office got the best outlook for the coming year, Reaser was less bullish on other asset classes. Hospitality received a C- for 2019, due to new hotel developments that will deliver in 2019. Along with convention center uncertainty and minimum wage increases, she expects the asset class to struggle in 2019.

Retail and multifamily—surprisingly—both received B- ratings for 2019. On the retail side the strong job market and wage growth will help to fuel activity. While industrial and ecommerce activity will continue to present a challenge, with little new supply and already low vacancy rates, she was positive on the retail market. For multifamily, which has largely been considered the real estate darling this cycle, slow to flat rent increases paired with potential regulatory constraints, including a potential increase of inclusionary housing from 10% to 15%, and growing anti-developer sentiment could hurt the market. The good news: San Diego is a supply -constrained market with an affordability advantage compared to the rest of Southern California.

Overall, Reaser expects slows gains in 2019 throughout San Diego and California, but still expects growth. Investors playing in the market should expect higher cap rates and prepare their budgets for increased contingencies. With that said, she is optimistic about 2019 activity.