News

San Diego Business Journal- 12/21/09

December 21, 2009

Commercial Real Estate Sector Not Likely to Rebound Next Year

By EMMET PIERCE

Commercial real estate professionals in San Diego Countyare bracing themselves for more lean times in 2010, as the recession continues to fuel high vacancy rates and a tight credit market makes it difficult to refinance loans.

That’s good news for tenants, which are winning rent concessions with their greater bargaining strength. In contrast, landlords are struggling to keep their buildings occupied, and many investors have become inactive as they wait for prices to drop. Analysts say conditions are likely to remain difficult for at least one more year because of high unemployment and the lingering national recession.

Among commercial sectors, local retail and office properties are likely to take the biggest hits as consumers limit their purchases and businesses that reduced their work forces delay rehiring.

“Things are really tough,” said Dennis Cruzan of Del Mar-based Cruzan/Monroe, a company that acquires and redevelops commercial properties. “We have unemployment. We have a very difficult economy. On the macro real estate level, you have illiquidity in the marketplace. All of this leads to a lack of clarity from a valuation and transaction perspective. I think there will be people leaving the business. Most of us are waiting for the next cycle of opportunities. Many are on the sidelines, waiting for clarity in the market.”

“Emerging Trends in Real Estate,” a forecast from the Urban Land Institute and PricewaterhouseCoopers, concludes that, nationally, 2010 will be the worst time for investors to sell properties in the report’s 30-year history. However, next year will offer great deals for those who can purchase with cash. The year ahead likely will see the commercial real estate industry bottom out, the report says.

Office Vacancy Rates To Soar

Without a major com­mercial harbor or a gateway international airport, the San Diegoregion has been hit harder than other major West Coast cities in the economic downturn, according to the Emerging Trends forecast. Despite San Diego’s warm climate and its attraction of high-tech and biotech jobs, office vacan­cies in 2010 are expected to approach 15-year highs. The housing market decline has hit local retail mar­kets hard. However, homebuy­ers are expected to find good deals next year. Commercial investors are forecast to find similar opportunities by 2011 or 2012.

For wary local landlords and investors, the future remains disturbingly uncertain. San Diego real estate economist Gary H. London views 2010 as “a time of foreboding.” He expects the current decline to continue in San Diego Countyfor two more years.

“The commercial markets are going to take a huge hit over at least the next year, depending on where you play in the commercial game,” said London, a contributing writer for the San Diego Business Journal. “It represents a time in which you have to figure out how to hold or sustain your assets, if you are an owner. If you are an investor, this is the time in the commercial cycle where you are starting to look for opportunities to purchase. The best time is when the markets are down.”

Stath Karras, executive managing director for Cushman & Wakefield Inc.’s San Diego region, says those who have the funds to invest in good commercial products in 2010 probably will see good returns within five years. Perhaps, but right now all aspects of commercial real estate are hurting, says Don Ankeny, president and CEO of San Diego-based Westcore Properties LLC.

“Industrial seems to have been impacted the least,” he said. “Retail has been hit extremely hard. A lot of the big retailers are gone. How do you replace those? There are a lot of storefronts out there. If you see a vacant Circuit Citystore, what do you put in there instead? Eventually you will find something … There are a lot of factors and uncertainty out there that make it hard to have a recovery.”

Changes Coming

Some investors fear that the recession could trigger a cultural shift that permanently changes shopping patterns. They wonder if consumers who have turned to discount stores and the Internet to save on their purchases will return to old shopping patterns once the economy is on track. London says things certainly will change, but that’s not necessarily bad.

“I have every confidence that a lot of the space will be occupied in coming years by users that we have not yet identified,” said London. “That may come from the clean technology sectors, it may come from new retailing concepts. In the meantime, the opportunity will be in retrofitting a lot of space for new uses or to make old uses more marketable. That means taking old office buildings and making them contemporary.”

During the recent real estate boom, many residential and commercial real estate investors took on more debt than they could handle. Credit standards were loose and investors were counting on property values to continue to rise. In its third-quarter report for the San Diego region’s office market, Voit Real Estate Services said the slow economy has caused tenant contractions, consolidations and business failures. This has led many tenants to request rent relief from landlords. Feeling the pressure, many of those landlords are, in turn, seeking new loan terms.

When the residential real estate market stabilizes, the commercial market will follow, says Tony O’Neil, a vice president at Voit Real Estate Services in San Diego. That seems to be happening. In November, the San Diego region’s median home price was $325,000, according to San Diego-based MDA DataQuick. That figure has remained the same for four months, possibly signaling a return to normalcy.

In an effort to avoid the spike in foreclosures that occurred in the residential market, commercial lenders have been doing more loan workouts and extensions. That reassures Dan Ryan, president of San Diego-based Veralliance Properties Inc. Many highly leveraged commercial loans that were sold to investors as mortgage-backed securities will be coming due in the next three years, he notes.

“The lenders have been extending,” he said. “I think the banks will cooperate with owners, except in egregious cases. I think we will see growth in 2011 and get back on our feet by 2012 … We probably can weather the storm.”

Emmet Pierce is a freelance writer for the Business Journal.