San Diego CA— Cushman & Wakefield in San Diego recently hosted a private Institutional Investor event for clients on December 5, 2018. Held at the Illumina Theater within The Alexandria at Torrey Pines, a prestigious business and community destination in San Diego, the program featured guest speakers Daniel Ryan, Co-Chief Investment Officer & San Diego Regional Market Director of Alexandria Real Estate Equities, Inc. (NYSE: ARE), and Brian Starck, Executive Director at Cushman & Wakefield. The event’s keynote speaker was Kevin Thorpe, Global Chief Economist of Cushman & Wakefield. Dan Broderick, Regional Managing Principal of the Southwest region of Cushman & Wakefield, who is based in San Diego, emceed the event and also provided welcome and closing remarks.
The core purpose of the firm’s special capital markets event was to present “What’s Next in San Diego” with experts examining and discussing San Diego’s current and future state of commercial real estate while also offering deep perspective on the local and broader economies. In his welcome address, Broderick, in referring to the San Diego and overall real estate landscape, characterized the economic state as being in “a remarkable time, and an era of prosperity.”
Broderick also acknowledged Cushman & Wakefield’s own local success, sharing that the firm has hired more than 120 employees in San Diego over just the past three years while, as a market leader, its San Diego offices have generated more than $5 billion in gross consideration in 2018.
Ryan, who leads Alexandria’s San Diego region, which consists of nearly five million square feet of state-of-the-art office and laboratory campuses, and was recognized by Broderick as “having helped transform the real estate landscape in San Diego over the years,” joined Starck, who focuses on life sciences and office leasing, for a brief fireside chat. A few takeaways from Ryan’s remarks included the following:
- Alexandria has been on an 8- to 9-year positive net occupancy growth trend, and life science continues to be a very attractive space, with 2018 having been a record year for venture capital investment. The monetary dynamics in life sciences are terrific, but there’s a significant need for talent to help form new companies.
- A talent crunch is prevalent, and it remains very competitive for companies to attract and retain talent. One of the advantages of San Diego, however, is it tends to be a little stickier in retaining talent.
- Alexandria is working with the City to allow for mixed-use development in industrial zones where its properties are located, creating opportunities to include retail, residential, and perhaps other amenities in its projects. Such an effort would help San Diego become more fully integrated, like other great life sciences clusters found in San Francisco, Boston, Seattle, etc., where you have a blend of sciences, retail, residential, theaters, and hotels.
- San Diego has great balance of demand and supply to consider new development projects.
Thorpe, who traveled from Washington, D.C., for the event, titled his section “Growth and Anxiety,” alluding to his perspective on the GDP and the stock market, respectively. As he put it, “look no further than GDP to see the growth, and look no further than the stock market to see the anxiety.” A few takeaways from Thorpe’s presentation included the following:
- Unlike last year, real GDP growth across the world is desynchronizing. While growth is slowing in other parts of the world, it continues to increase in the U.S., whose economy is in good shape.
- Most recently, leading U.S. economic indicators are cooling off, which is not necessarily something to worry about—in fact, it’s arguably ideal for keeping economy from running too hot or too cold (the Goldilocks scenario). Occasional pullbacks/mini-corrections are critical to maintaining the expansion and keeping it from overheating.
- The drop in oil prices is creating a tailwind and allowing for a potential boost in other consumer spending and thereby supporting business profits and jobs.
- Recessions are triggered, not spontaneous. Nothing in the U.S. economy today jumps out as ominous.
- In the past 40 years, cycles/expansions tend to last longer than they did several decades ago. July 2019 would officially mark the longest expansion in the post-World War II era. The U.S. economy is larger and more diversified, it takes a lot more to knock it down and the Federal Reserve is better at conducting monetary policy and monitoring the data in real time.
Sources for Anxiety
- U.S. unemployment is historically low (and unemployment is tight everywhere, with some metro areas incredibly low and San Diego at just 3.3%). Tax cuts at this stage in the cycle increase the likelihood the U.S. economy could overheat.
- As tax cuts stimulus fades in 2020, odds of a slowdown become higher.
- The expansionary cycle is approaching its longest on record, making odds greater that a slowdown is more likely than not.
- The number of employers that say they cannot fill positions is at an all-time high—it has never been harder to find good workers than it is precisely right now.
- Trade tensions/wars: Higher tariffs will slow the economy via higher prices, which erode business profitability; China’s debt overhang is also a concern.
- Diverging monetary policy and interest rate movements to create a mix of headwinds and tailwinds for property values.
- Stock values and housing values are at record highs and will not go up indefinitely.
One important question Thorpe addressed was not of “when” the next recession is going to happen (to which he answered “nobody really knows”), but that of “if it does happen, what will the next recession look like?” To this, he offered, “It’s not likely to be nearly as severe as 2008/2009, the one that scared us to the core—deep recessions like that Great Recession seem to only occur every 50 years, according to history. But rather, any downturn ahead is likely to be more of a traditional decline: two to three quarters of negative GDP growth and moderate job loss.”
Thorpe offered, “The U.S. financial system is about as solid as I have seen” and encouraged investors to “stay aggressive.”
San Diego Metro
Thorpe also touched on the local climate and outlook for San Diego’s commercial real estate and economic segments. Included among his key points were the following:
- San Diego remains solid, with strong job growth on track to create 26,000 net new jobs in 2018. About half those jobs are office using (which equates to estimated 2M SF absorption in office sector).
- San Diego will be one the markets that would benefit most from Congress’s latest spending bill.
- Two of San Diego’s key economic engines (Defense and Health Care/Biotech) going into 2019 likely to be much stronger.
- San Diego is a bit of a late bloomer in the current market cycle, leaving more runway. Given its slow start in recovery, it has more upside than most other markets.
- San Diego’s office leasing fundamentals are still tightening, bucking the national trend.
- San Diego is an ideal market for office development, given the absorption trend, and may even be underbuilt.
- San Diego is currently the 12th highest office rent in the country at $36.24 per square foot, full service. Just 15 years ago, San Diego actually recorded higher office rents than San Francisco, whereas today its average stands at half of San Francisco’s ($72.30 psf).
- While San Diego real estate has gotten pricey from a purchase standpoint, spreads still remain justifiable—and even has a nice buffer against rising interest rates. Further, San Diego office is not expensive relative to global cities. From a risk-adjusted basis, San Diego is a strong buy.
- San Diego industrial maintains strong fundamentals with strong pricing.
A Splash into Sustainability
During the program, sustainability was another point of emphasis. Ryan very cognizant of the real estate industry’s role in advancing sustainability, asked, “Generationally, how do we affect the outcome of the world and make a difference as a community?” The long-view approach of his team at Alexandria is to remain proactive in its sustainability efforts. The company continues to thoroughly analyze the effects and efficiencies of it building materials, along with its construction processes and operations, as many tenants today likewise seek to improve their sustainability—and decide, “yes, they would like to be in a LEED building.” Alexandria, a founding member of the Fitwel Leadership Advisory Board, employs Fitwel and the WELL Building Standard to optimize building design and operations to positively impact occupant health and well-being. Ryan also mentioned the company is exploring alternative ways to use capital in smart, off-site ways that positively affect the environment.
Ryan and Starck talked about how as a society we can all work together to become leaders in sustainability and in our everyday efforts, including simply recycling properly, to help become better stewards.
Thorpe briefly added, “Sustainability should be the goal we all strive for in real estate in a number of different sectors. But whether you make a proforma work remains the challenge, but it sounds like the returns are there.”
Additionally, Ryan noted, “Despite all the negativity we seem to consistently hear about, the world has really never been in better shape than it is today. We are living much healthier and longer than before; advances in healthcare and medicine have made things significantly better; and we’re also in one of the most peaceful times compared to other periods in history.”