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San Diego Investment Market Slows in 2017, but Still Again ‘Above Average’

Industrial, Multi-Family and Office Sectors all Highlight Year’s Activity

San Diego County CA— For the third straight year, despite a slowdown from recent years, San Diego’s capital markets sector proved to be ‘above average’ according to Cushman & Wakefield’s year-end market report. Sales volume in San Diego for properties $10 million and greater reached $5.7 billion in 2017, lifted by a much more active second half. Total annual deal volume in San Diego has kept above the 15-year annual average of $4.7 billion for the last three consecutive years.

“San Diego’s commercial real estate investment market transaction volume for properties $10 million and greater reached $5.7 billion in 2017, coming in a bit below the $6.7 billion transacted in 2016 and $6.6 billion in 2015 yet ahead of the level seen in 2014,” said Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego. “In 2017, sales volume for all product types combined declined by 14% year-over-year compared to 2016 with retail investment sales accounting for the greatest decrease (-51%), followed by office (-23%) and multi-family (-0.6%).”

“The reduction in sales volume across all product types in San Diego in 2017 can be attributed to the cautious approach taken by investors who thought we may be headed for recession, in conjunction with heightened investor selectivity met with a shortage of for-sale market supply,” said Rick Reeder, Executive Managing Director with Cushman & Wakefield’s Capital Markets in San Diego. He added, “Today, we are already seeing more opportunities in the market by sellers to start 2018 that is helping generate comparatively stronger sales activity as institutional investors come off the sideline; whereas at the start of last year many sellers felt the markets were imbalanced subsequently restricting supply. The last several months have brought much more clarity which has enabled sellers to feel more confident in bringing their product online at good pricing. Another reason for the current loosening supply is some sellers are also anticipating a limited window with the expectation interest rates will continue to climb.”

Mr. Reeder also pointed out, “While institutional capital had shied away from suburban office investments during the first few quarters of last year, in the latter half of 2017 and now early in 2018 we are seeing the return of institutional investors to this product as underlying fundamentals continue to improve in the vast majority of submarkets. Meanwhile, industrial and multi-family product continues to be in high demand.”

According to the report, the industrial sector had a standout year in 2017 in that it was the only major property sector to post growth in deal activity for the year (+30%). The multi-family sector accounted for the highest sales volume among all property types at $2.1 billion or 38% of the total sales followed by office at $1.9 billion (33%).

“Transacting 50% less volume in 2017 than in 2016 while also ranking among the lowest sales activity of any major market in the U.S. according to data from Real Capital Analytics, San Diego’s retail investment sector appeared the most sluggish due to the lack of quality product coming on line in 2017,” said Phil Lyons, Managing Director of Cushman & Wakefield San Diego. “Current owners have been unwilling to part with their existing San Diego assets for fear they won’t be able to find a suitable up leg in the same area.  The region’s retail market continues to maintain solid fundamentals with continued leasing growth and demand in 2017 and new construction at historic levels. 2018 should see a higher volume and velocity of product coming to the market with the threat of rising interest rates pushing sellers to capitalize on the historically low cap rate environment.”

Bryce Aberg, Executive Director in San Diego said, “As more investors seek industrial properties, prices will continue to rise and cap rates will continue to compress. The lack of land for new development in core industrial markets and the rising of constructions costs are driving values. The average cap rate in 2017 was the lowest for multi-family properties (4.9%), followed by retail (6.2%), industrial (6.4%) and office (6.6%). There are then some cap rate movements that are a function of changes in asset quality and not necessarily a fall in asset prices.” Aberg also adds, “As yields continue to compress in neighboring counties, San Diego is still looked at as a value opportunity with excellent market fundamentals.”

During the second half of 2017, there were seven investment transactions topping the $100 million mark, led by the sales of DiamondView East Village (313,103 sf for $207 million), Mission City / Sorrento Mesa Portfolio (675,142 sf for $174.5 million), Avion at Spectrum (421,828 sf for $140 million), Olympus Corsair 328,408 sf for $136.5 million), and the Waterleaf Apartments (456 units for $117.5 million). The second half of the year also highlighted investor willingness to pay premium pricing for quality assets, including the sales of Township 14 in Del Mar Heights at $683 per square foot (psf), the aforementioned DiamondView in Downtown at $661 psf, and an industrial asset in Rancho Bernardo occupied by Amazon at $334 psf.

David Bitner, Americas Head of Capital Markets Research, added, “There has been a persistent demand for loans to buy commercial real estate and there is a tremendous appetite for stabilized and value-add assets which are in limited supply. As investors look to diversify their portfolios away from highly valued equities markets, we expect more capital to flow into real estate where valuations are less extended. Recent equity volatility further underscores the benefits of real estate in institutional portfolios.”

CLICK HERE to access Q4 2017 San Diego Capital Markets MarketBeat Report

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