San Diego commercial real estate reached the highest figures since the first half of 2007.
San Diego commercial real estate reached the highest figures since the first half of 2007.

San Diego Sales Volume Continues to Soar

Carrie Rossenfeld Finance & Capital Markets

CBRE reports that after a slow first half, the total sales volume for San Diego commercial real estate reached the highest figures since the first half of 2007. Office sales hit the highest market since the second half of 2007; industrial sales hit the highest on record, which goes back to 2003; multifamily sales were just above the historic average, but retail sales were slower than recent years.

According to the firm, the high dollar volume was driven by both higher price tags and a higher volume of properties sold. Commercial properties hit a post-recession high price per square foot, reaching $271 on average, and more than 10 million square feet of commercial property traded in the second half, which has occurred only one other time since 2007.

Buyer demand should remain strong given the positive fundamentals in the market, the report states. Across all commercial types, vacancy rates remain low, new product is limited and rents are expected to remain steady or rise. Multifamily should remain an attractive asset, and CBRE Econometric Advisors predicts rents will increase 2.2 percent over the year.

In the office sector, San Diego continued to have the lowest suburban cap rate among what CBRE calls tier-II office metros, despite an uptick in class-AA and class-B rates. The region also had by far the lowest value-add cap rates in tier-II and the lowest class-A value-add cap rate in tier-II CBDs.

Average office cap rates increased approximately 20 bps, and all classes and locations were either flat or up, CBRE reports. A small set of large deals led to the high sales-volume figures. Of the 49 properties that sold for over $5 million in the second half of 2017, nine were larger than $50 million, including four larger than $100 million.

The office buyer type mix in San Diego nearly mirrored the rest of the U.S. in 2017. Class-AA CBD and class-A suburban properties had flat cap rates, which were also the property classes that drove the largest deal problem, according to CBRE.

From an industrial perspective, the average stabilized cap rates changed for the first time since the first half of 2015, falling to 25 bps, CBRE reports. Industrial cap rates are at the lowest ever recorded by this survey, going back to 2009. San Diego had the lowest industrial cap rate for all tier-III industrial metros, regardless of building class, for both stabilized and value-add properties except class-C stabilized.

Of the 41 industrial properties that sold for over $5 million in the San Diego market, 17 were in North County, 15 were in Central County, eight were in South County and one was in East County. Deals were nearly evenly split between 21 flex and 20 warehouse buildings, but flex deals sold at an 87 percent premium on a price-per-square-foot basis. Four of the 41 properties sold at greater than $50 million, accounting for more than a third of the total sales volume in the second half of 2017.

In the retail sector, San Diego had the lowest cap rates among tier-II retail metros for neighborhood/community centers, across all classes. The region also had the lowest stabilized cap rates for class-A neighborhood/community and power centers, regardless of metro tier. Neighborhood-center cap rates have appeared to settle, but power-center cap rates have been on the rise since 2016.

Retail transaction volume slowed in 2017, but actively remained strong in North, East and South County, says CBRE. Private investors dominated the buyer pool, as interest from institutional investors appears to have faded. Volume in the second half of the year was driven by a few very large deals, including Scripps Ranch Marketplace, Gateway Marketplace, and Eastlake Terraces, which all sold for more than $40 million.

Looking at the multifamily sector, infill apartments in San Diego yielded the third-lowest cap rates for class-A properties, regardless of metro tier, the report states. All San Diego apartment cap rates were flat or lower, regardless of building class, whether they were infill versus suburban or value-add versus stabilized. San Diego had the lowest cap rates across all classes for suburban properties in tier-II metros.

More than one-quarter of multifamily sales volume in this market came from projects that were slated for renovation or redevelopment, which likely contributed to the drop in value-add cap rates. Of the 44 properties that sold for over $5 million, 17 were in Central County, 14 were in North County, seven were in East County, five were in South County and one was Downtown.

Six multifamily properties sold for more than $50 million, with three deals exceeding $100 million in the second half of 2017. Only one property was purchased by a public or REIT buyer in 2017 — American Assets Trust’s purchase of Pacific Ridge — but that $232 million deal represented 11 percent of the sales volume for the year.

MULTIFAMILY
San Diego infill apartments yielded the third lowest cap rates for Class A properties, regardless of metro tier. All San Diego apartment cap rates were flat or lower, regardless of infill versus suburban, value-add versus stabilized or building class. San Diego had the lowest cap rates across all classes for suburban properties in Tier-II metros.

Average office cap rates increased approximately 20 bps and all classes/locations were flat or up.

A small set of large deals led to the high sales volume figures. Of the 49 properties that sold for over $5 million in H2, nine were larger than $50 million, including four larger than $100 million.

The buyer type mix in San Diego nearly mirrored the rest of the U.S. in 2017.

Class AA CBD and Class A suburban properties had flat cap rates, which were also the property classes that drove the largest deal volume.

Industrial cap rates fell for the first time since H2 2015.

Of the 41 properties that sold for over $5 million, 17 were in North County, 15 in Central, eight in South County and one in East County.

Deals were nearly evenly split between flex and warehouse buildings (21 and 20), but flex deals sold at an 87 percent premium on a $/SF basis.

Four of the 41 properties sold at greater than $50 million, accounting for more than a third of the total sales volume in H2 2017.

In the office sector, San Diego continued to have the lowest suburban cap rate among what CBRE calls tier-II office metros, despite an uptick in class-AA and class-B rates. The region also had by far the lowest value-add cap rates in tier-II and the lowest class-A value-add cap rate in tier-II CBDs.

Neighborhood center cap rates have appeared to settle, but power center cap rates have been on the rise since 2016.

Transaction volume slowed in 2017, but activity remained strong in North, East, and South County.

Private investors dominated the buyer pool, as interest from institutional investors appears to have faded.

H2 2017 volume was driven by a few very large deals, including Scripps Ranch Marketplace, Gateway Marketplace and Eastlake Terraces, which all sold for more than $40 million.
More than one-quarter of sales volume came from projects slated for renovation or redevelopment, which likely contributed to the drop in value-add cap rates.

Of the 44 properties that sold for over $5 million, 17 were in Central County, 14 in North, 7 East, five South and one Downtown.

Six properties sold for more than $50 million, with three deals exceeding $100 million in H2 2017.

Only one property was purchased by a public/REIT buyer in 2017, but that $232 million deal represented 11 percent of the sales volume for the year.

<em>by Carrie Rossenfeld</em>