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San Diego Daily Transcript

November 11, 2008

San Diego slips in Emerging Trends ratings, but performs better than neighboring counties

By MARY LYDON , Urban Land Institute

The darling of the Urban Land Institute/PriceWaterhouseCoopers Emerging Trends in Real Estate survey just three years ago, San Diego fell to the middle of the pack for 2009 among big cities contending for the title of best place to develop and invest in real estate.

Now in its 30th edition, Emerging Trends in Real Estate is the most highly regarded and widely read forecast report in the real estate industry.

Of course, it isn't expected to be a robust real estate year for any city, with the survey predicting that 2009 will be the first time in decades that the markets will see negative private equity investment returns. Most real estate professionals interviewed for the survey did expect a slow recovery to start in early 2010, though.

In the 2009 survey, San Diego received a 4.92 on the one to nine (nine being best) measurement scale in terms of best major cities for commercial and multi-family investment, with Seattle ranked No. 1 at 6.15. For both commercial real estate development and for-sale home building, San Diego scored a 3.4 and a 3.36 respectively, with San Francisco taking the top spot in both of those categories with scores of 4.79 in each.

In the 2008 Emerging Trends survey, San Diego's score on the commercial and multi-family investment scale was 5.95, with New York City receiving the top score of 7.13. San Diego scored 5.92 last year on the commercial real estate development scale, with New York City again topping the list at 7.17. San Diego received a 4.65 on the for-sale homebuilding scale in 2008, with New York City receiving the top score of 6.25.

The survey identified San Diego as the overall top performing market in 2006.

Real estate experts gather today at the Joe & Vi Jacobs Event Center for the ULI Emerging Trends Conference, hosted by the San Diego/Tijuana District Council of Urban Land Institute (ULI). Dean Schwanke from ULI's headquarters in Georgetown will present the Emerging Trends in Real Estate survey and an overview of what it means to the San Diego market. He will be joined by an array of other locally and nationally renowned real estate professionals to discuss challenges and opportunities in the real estate market for 2009.

Overall, the 2009 Emerging Trends survey called San Diego a "solid hold market," cautioning that office vacancies are in the mid-teens, the home market will hurt the historically strong retail market, and the hotel and convention market would do better with a bigger airport.

San Diego's prospects were much stronger than those of Orange County or Riverside County , both of which took strong hits from the mortgage meltdown and now see the results trickling through the rest of their real estate industry.

Interviewees expect multifamily investment to take the top spot in 2009 in most markets due to the strong rental market created by a large Generation Y population leaving home, more Baby Boomers wanting to downsize to apartments and the mortgage market meltdown forcing current and would-be homeowners to rent instead. The report warns, however, that "high-end apartments may face softening markets" as many new, failing luxury condominium buildings hit the rental market instead.

Throughout the country, the Emerging Trends interviewees say urban core and infill locations will be favored, as more people react to high gas prices and congestion by living and working in the same area. They also expect transit-oriented development projects to remain strong.

Cities off the global pathways fare worse than those with good seaports and international airports. Port industrial property investments are one of few bright spots identified by the survey.

Other niche development types that might perform better than average include student housing, infrastructure, medical office, senior housing, tax credit housing, urban mixed use and self storage.

For office building owners throughout the country, the survey advises enhancing leasing activity and concentrating efforts toward retaining tenants. For office developers, the survey says, "most developers might as well take the year off and those with projects coming online need to brace for leaner bottom lines."

Green buildings will continue to attract tenants, and sustainably designed buildings will mostly likely enjoy lower vacancy rates than their traditional-construction counterparts. "Trophy" and 24-hour city office buildings will also fare better.

The Emerging Trends survey registers the lowest sell signal in its 30-year history, and goes on to say, "selling makes little sense when buyers want opportunistic pricing." 2008 real estate deal volumes were only 20 percent of those transacted in 2007, and 2009 is unlikely to be any better.

Calling it "an unprecedented avoidance of risk," the survey says that opportunity funds have raised a lot of money, but their managers don't want to invest it until the market has bottomed out, an occurrence the survey predicts will happen in 2009 for the residential market.

In order for real estate markets to improve, the survey says that private markets need to correct, debt capital needs to flow, regulators need to help restore confidence in the securities markets and the economy needs to improve.

Though survey respondents predict that 2009 will be the worst year for the industry since 1991 to 1992, on the positive side, developers will pay less for labor and materials in 2009 and most of the multifamily investment market shows "enduring strength."

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Lydon is executive director of Urban Land Institute San Diego/Tijuana District Council.