SAN DIEGO’S COMMERCIAL REAL ESTATE MARKET CONTINUED TO SHOW SIGNS OF STRENGTH, DESPITE A SLOW-DOWN IN TRANSACTION VOLUME IN H1 2018

Office deals posted the second highest price per square foot in more than ten years, according to CBRE Research

San Diego – September 13, 2018 — San Diego commercial real estate transactions continue to demand high price tags across all product types, compared to the five-year average, according to CBRE Research. The H1 2018 Trends: San Diego Capital Markets Report tracks property sales activity for the San Diego region and uses cap rate data from the CBRE North American Cap Rate Survey  to analyzes local cap rates and sales figures by buyer and product type.

“San Diego’s market fundamentals are supported by strong regional economic drivers, “ said Hunter Rowe, vice president of CBRE in San Diego. “Demand for quality, well located, amenitized office and industrial product remains coveted, particularly for value-add and core real estate. Although cap rates remained largely unchanged from H2 2017, the spread between stabilized office and industrial product is 50 to 75 basis points.”

After coming off a banner year in 2017 across all product types, particularly H2 2017, which was the highest volume half in more than ten years, total sales volume slowed significantly in H1 2018. Total sales were down over 35 percent from the previous half and nearly 25 percent lower than the five-year average. Although sales activity has slowed through the first six months of 2018, overall sales volume is expected to rebound in H2 2018 with several high-profile listings scheduled to close.

Despite the slowing transaction volume, deals continued to command considerable investor interest, resulting in higher values. Across all product types, price per square foot or unit were up compared to the five-year average. Office deals posted the second highest price per square foot in more than ten years due to more core-plus and stabilized assets coming to market. Apart from the recent uptick in retail cap rates, the balance of the market remained stable.

Among the major commercial real estate sectors:

Office

San Diego office cap rates for Class A and AA increased 12 and 13 basis points (bps), respectively due to buyer demand, evidenced by a softening in sales volume although rents and tenant demand remained strong in the office sector. Cap rates for Class B and C office assets remained flat from H2 2017.

There were three office deals over $100 million in H1 and another just below. Of the remaining deals, 15 were between $10 million and $50 million and 11 were below $10 million.

Price per square foot remained 16.2 percent above the five-year average, showing many buyers are still willing to pay a high price.

Industrial

Industrial product continues to be a hot asset and cap rates fell for the second straight half to the lowest rate on record for all classes, going back to 2009.

Vacancy rates are at or near all-time lows while rents have climbed in recent years, making it an attractive investment for buyers looking to hold and receive steady cash flow.

More than 3.5 million square feet in new industrial construction is expected to increase the inventory in the next several years, which will do little to satisfy the overwhelming tenant demand for quality industrial space in San Diego.

Retail

Retail cap rates continued to rise both locally and in most U.S. metros. Market fundamentals in the local sector are strong, but limited buyer demand is likely holding back asset value. San Diego had the lowest stabilized cap rate for Class B neighborhood/community centers and the fourth lowest cap rate for Class A power centers across all U.S. metros.

Despite the softening overall volume of sales, price per square foot was 14.6 percent above the five-year average mark.

Multifamily

Already low, multifamily cap rates fell to a record low (going back to 2012), when averaged across geography and product class. Suburban product remained especially attractive, due in part to the relatively low supply pipeline for that type of product. The majority of product in the pipeline is infill, focused in and around downtown San Diego, making suburban multifamily an attractive long-term play.

Investors have been willing to pay top dollar for multifamily properties. The average sale reached $271,000 per unit in H1, the highest on record going back to 2003.