2013 San Diego Commercial Real Estate Forecast NATIONAL UNIVERSITY SYSTEM INSTITUTE FOR POLICY RESEARCH
A Publication From Cassidy Turley San Diego www.cassidyturley.com/sandiego San Diego State University The Corky McMillin Center for Real Estate www.sdsu.edu/realestate NATIONAL UNIVERSITY SYSTEM INSTITUTE FOR POLICY RESEARCH National University System Institute for Policy Research www.nusinstitute.org
A Letter From The CEO Valued Clients and Colleagues: Throughout 2012, Cassidy Turley has continued to grow and expand across the United States in every discipline of our practice. In Southern California, we added teams in Downtown Los Angeles and Orange County, and we continued to grow in San Diego adding a healthcare investment team and multi-family investment sales brokers as well. We are now three years into the making of Cassidy Turley, and we are proud of the brand name and quality of what we have created from coast to coast. As always, we keep our clients needs first. We expand and enhance our cutting edge resources and services to consistently exceed our clients expectations. In 2013, we will provide you with innovative research products to bring you quality and insightful information as quickly as possible so that we can add critical value to your business decision-making process. Our commitment to developing these quality research products is unwavering, which is why Cassidy Turley San Diego is pleased to provide you with our 2013 Forecast highlighting the San Diego commercial real estate market. Locally, 2012 will go down as the year of stabilization. Technology, biotechnology, and even some traditional business service sectors such as tourism, banking, insurance and real estate, displayed growth. From November 2011 to November 2012 San Diego added a total of 24,600 jobs, an annual growth of 2.0%. Professional and business services recorded the greatest year-over gain, adding 8,600 jobs followed by eight other sectors. Overall, 2012 continued to be a year of modest corporate growth and stabilization, despite a volatile macro environment of slowing international growth, major national and local elections, the recent Fiscal Cliff decision, and the national debt ceiling. In San Diego, while leasing activity has been persistent through the year, the extremely large transactions have subsided, except for some notable transactions in the Life Science and Technology sectors. Still, no new speculative office or industrial development is slated to come online. However, there will be some build-to-suit developments delivered. We expect lease rates to continue to increase moderately in the core Class A markets. Given San Diego s economy is heavily weighted towards defense, education, start-up technology and life science, it is imperative that our fiscal issues are prudently and quickly resolved to give companies and executives clarity around defense program spending, and tax treatment for the private investors. Leasing activity will be heavily influenced by decision-maker confidence levels and the health of our interwoven global and local economies. Our 2013 Forecast brings you local expertise on Office, Industrial, Retail, Investment and Multi-Family real estate in one comprehensive source. As we look ahead into 2013, we expect to see improvements and/or stabilization of market fundamentals in all sectors of the San Diego commercial real estate market. General highlights and trends for the 2013 market include: Office: In 2013, the negotiating power between landlords and tenants in the Class A central core market is expected to shift. Although, tenants in the Class B and C categories and in secondary locations will continue to have attractive opportunities. Countywide, 2013 will be about strengthening leasing fundamentals with an adjustment to decreasing average tenant footprints. Industrial: The industrial market has been improving in parallel with the national and local economies and is expected to stay on course while maintaining moderate yet steady improvements in 2013. The countywide direct vacancy rate is forecasted to decrease by 130 basis points to 7.5% by the end of 2013.
Retail: Continued pressure on asking rents and competitive concessions offered by landlords will support positive leasing activity in 2013 resulting in a moderate decrease in the countywide total vacancy rate from 5.0% in 2012 to 4.8% in 2013. The recovery is underway, albeit sluggish. Retailers will continue to compete for the most visible locations, especially with a dearth of new construction projects on the horizon. Investment: A slight increase in transaction volume is expected in 2013, hindered by economic uncertainty and political turmoil. Tax and spending changes may delay investment decisions as investors slowly become comfortable with their monetary effects on transactions. Demand for top products in secondary markets will remain strong, but will be met with a shortage of product. Multi-Family: Development activity has heated up, making the multi-family sector the first to fully recover and begin sustainable expansion. Fueled by pent up demand and historically low interest financing, investment activity in this sector is forecasted to remain fierce. With household formation and employment poised for moderate improvement, San Diego should expect to see vacancies tighten and rental rates rise slightly by the end of 2013. Overall, we expect 2013 to be a positive year for San Diego s commercial real estate market. Commercial real estate in this market will continue to be a relatively attractive place for investors to place their money in 2013. There will continue to be fewer and fewer distressed transactions in the market. There will remain creative opportunities for tenants/users that do not need to be in large Class A projects in the core markets. Given that no speculative office product will be delivered in 2013 it should bode well for landlords who have vacancy to fill in 2013. In any market, good or bad, there are opportunities. Our goal is to be a trusted advisor to you, our clients, to provide you with the most sophisticated insight and analysis you need to take advantage of these opportunities. We want you to achieve your real estate goals now and in the future. We are eager to continue working with you and to expand our relationship across all of our business lines and geographies. We live in a complex and dynamic economic environment, where uncertainty is ubiquitous. We are continually pushing ourselves and challenging each other to raise the quality of our product, service and insight for you. We welcome the opportunity to discuss the ever-changing landscape, as well as the specifics of our 2013 Forecast in further detail. For questions or additional information on San Diego market research, please contact myself or Jolanta Campion, Director of Research, directly at 858.625.5235 or Jolanta.Campion@cassidyturley.com. Sincerely, Daniel T. Broderick Cassidy Turley San Diego President & CEO
Contributors NATIONAL UNIVERSITY SYSTEM INSTITUTE FOR POLICY RESEARCH Cassidy Turley San Diego Jolanta Campion Director of Research T 858.625.5235 F 858.630.6320 jolanta.campion@cassidyturley.com Anthony Espinoza Research Analyst T 858.625.5267 F 858.630.6320 anthony.espinoza@cassidyturley.com Shannan Diver Research Analyst T 858.625.5252 F 858.630.6320 shannan.diver@cassidyturley.com Contributors: Ben Schwartz, Transitional Reseacher Sean Workman, Manager, Creative Services Lesley-Joann Kolb, Marketing Manager 4350 La Jolla Village Drive, Suite 500 San Diego, CA 92122 www.cassidyturley.com/sandiego National University System Institute for Policy Research Kelly Cunningham National University System Institute for Policy Research Economist and Senior Fellow T 858.642.8008 kcunningham@nusystem.org 11355 N. Torrey Pines Road La Jolla, CA 92037 www.nusinstitute.org San Diego State University Michael Lea, Ph.D. Director, The Corky McMillin Center for Real Estate College of Business Administration T 619.594.8327 F 619.594.3272 mlea@mail.sdsu.edu Xudong An, Ph.D. Associate Professor Department of Finance College of Business Administration T 619.594.3027 F 619.594.3272 xan@mail.sdsu.edu 5500 Campanile Drive San Diego CA 92182-8238 www.sdsu.edu/realestate
Table of Contents San Diego Economic Overview. 1 San Diego Office........ 9 San Diego Industrial..... 21 San Diego Retail....... 31 San Diego Investment.... 45 San Diego Multi-Family.... 55
San Diego Economic Overview 1 San Diego s Economic Momentum Slowing in 2013 San Diego s economy continues to modestly grow despite multiple bumps along the way. Job creation remains largely subdued as the economy struggles to mend. 2012 began with hopes of accelerating momentum and greater employment rebound. Indeed, job numbers jumped in the middle of the year, but dwindled as the year progressed. The uncertainties of fiscal, monetary, and regulatory policies in an election year, with Congress remaining in gridlock and fiscal cliff looming, all served to diminish prospects of more vigorous economic expansion. Sluggish Outlook for Economic Growth San Diego s gross domestic product Fig. 1 San Diego Gross Domestic Product (GDP) San Diego Annual Change GDP Percentage of: Constant Dollars* Year (Billions) CA U.S. S.D. CA U.S. 2001 $114.372 8.54% 1.11% 1.3% 0.1% 1.1% 2002 $123.180 8.88% 1.16% 5.3% 1.9% 1.8% 2003 $130.944 8.96% 1.18% 3.9% 3.1% 2.5% 2004 $141.549 9.02% 1.19% 5.2% 4.6% 3.5% 2005 $151.571 8.97% 1.20% 3.9% 4.2% 3.1% 2006 $159.813 8.89% 1.19% 2.2% 3.3% 2.7% 2007 $166.387 8.89% 1.19% 1.3% 1.0% 1.9% 2008 $171.174 9.01% 1.20% 1.0% -0.4% -0.3% 2009 $168.976 9.24% 1.21% -2.9% -4.7% -3.1% 2010 $171.568 9.14% 1.18% 0.9% 1.7% 2.4% 2011 $178.866 9.13% 1.19% 2.1% 2.0% 1.8% 2012e $185.759 9.14% 1.19% 1.7% 1.8% 1.7% 2013f $193.585 9.15% 1.19% 1.5% 1.6% 2.0% *Adjusted by GDP implicit price deflator. e: estimate f: forecast Source: Bureau of Economic Analysis, U.S. Department of Commerce; National University System Institute for Policy Research. (GDP), the most comprehensive measure of the economy, reached an estimated $185.8 billion in 2012. San Diego slightly led the rest of California s economic expansion with northern California bolstered by thriving international technology companies, such as Apple, Facebook and Google. San Diego s GDP is estimated to have grown 2.1% in 2011, the strongest since 2006. Momentum, while still positive, slowed in 2012 and is projected to further slow in 2013. San Diego slightly exceeded California s 2.0% gain in 2011, and bettered the U.S. s 1.8%. Growth in 2012 faded across the nation as San Diego matched the 1.7% U.S. gain, and slightly trailed California s 1.8% gain (Figure 1). The outlook for San Diego in 2013
is to further slow to 1.5%, lagging California s similarly tepid expansion at 1.6%. The forecast of 2.0% growth for the U.S. will be the second highest rate of expansion in six years, only exceeded in 2010 as the country emerged from recession in 2009 (Figure 2). Trends Among San Diego Industries usually bestow San Diego with an above average healthy and thriving economy. San Diego s technology industries significantly bolster the region s vitality and economic prosperity. While tech companies account for only 6% of San Diego businesses, the industries account for 11% of all jobs, and 21% of all payroll wages. The average annual wage among San Diego tech companies is $101,500 as of 2012, 90% higher than San Diego s overall average wage of $53,500. Separating non-technology jobs from the overall average, the wages of non-tech industries is $47,500, less than one-half of technology company wages. Among San Diego s many core assets is a diversified economy. A metroplex of telecommunications, biotech, computers, and electronics, mixed among popular travel destination and an international border, with extensive military base operations and associations. San Diego continues to benefit from near perfect climate attracting an educated and talented labor force, technically advanced research institutions and educational systems, retaining both active and retired U.S. Navy and Marine Corps personnel, and generally thriving retirees. These attributes Fig. 2 Comparison of Annual Change in GDP Source: U.S. Department of Commerce, Bureau of Economic Analysis. e: estimate, f: forecast by National University System Institute for Policy Research. 2
San Diego Economic Overview 3 Fig. 3 Percent of San Diego Jobs/Total Earnings 23.1% 25.3% 31.1% 28.2% 45.8% 46.5% Data on occupations and average compensation shows the number of higher wage occupations (defined as 25% higher than the countywide average wage) increased between 2007 and 2011. In addition, compensation for those positions that require specific training and greater technical skills increased by a stronger pace than other occupations. At the same time, middle income jobs (+/- 25% average wage) were most squeezed over the past four years in terms of both number of jobs and total compensation. Low income jobs (25% below 40.4% 44.8% 30.7% 26.6% 28.9% 28.6% 2007 2011 2007 2011 Jobs Earnings Source: Quarterly Census of Employment and Wage, 1Q12. U.S Bureau of Labor Statistics. High Wages Medium Wages Low Wages average wage), slightly increased in proportion, and barely decreased in total compensation. As depicted in figure 3, the proportion of workers employed in high wage occupations in San Diego increased between 2007 and 2011, as well as the proportion of wages earned by those workers. In contrast, the number of San Diegans working in middle wage occupations declined, while low income jobs slightly increased in proportion as well. Professional and business services and the health care industry have risen significantly relative to the total economy. Healthcare has continually led gains growing even throughout the recession. Home to a significant and expanding population of retirees, San Diego requires ever more health care services with local health providers significantly expanding facilities and services. Government, including active duty military, directly contributes about 18% of San Diego s GDP. Contributions from government expenditures rose significantly over the past decade almost entirely due to expansion in military spending. Potential federal government decisions to severely cut defense expenditures have major implications for San Diego, home to the largest number of military personnel anywhere in the country. In total economic impact, nearly one-quarter of the regional economy depends upon Department of Defense (DoD) expenditures. Despite these concerns, San Diego could potentially benefit if cutbacks are enacted elsewhere and reassigned or consolidated to local bases. A strategic refocusing on Pacific Rim activities could also
bolster San Diego s extensive Navy operations. Defense contractors locally are deeply integrated in developing and producing modern military systems and applications increasingly used for more efficient operations especially with overall budgets being cut. Cutting-edge applications developed among San Diego contractors include intelligence gathering, cyber security, and other defense-based electronics and software systems. Despite manufacturing employment decreasing in number, production dollars in recent years have steadily risen as value-added manufacturing processes expand. Increasing high value manufacturing processes use fewer but more high skilled (and higher compensated) technology workers to produce far greater output. San Diego is a hub for high-value research and innovation in biotechnology, genomics, communications, software development, cybersecurity and clean-tech. San Diego s historic aerospace sector is also thriving particularly as unmanned aerial vehicle (UAV) systems are prominently used by the U.S. military. Travel and tourism is staging one of the more dynamic recoveries Fig. 4 San Diego Population Change Source: California Department of Finance; estimate and forecast by National University System Institute for Policy Research. 4
San Diego Economic Overview Fig. 5 Comparison of Change in Nonfarm Jobs Real estate activities account for nearly one in every five dollars generated by the regional economy. Housing construction is improving, although admittedly from greatly reduced levels the past several years. Demand for apartments and other rental housing has significantly risen. Two-thirds of new residential construction is multiple-housing units. 5 Source: U.S. Department of Labor, Bureau of Labor Statistics; California Employment Development Department. of San Diego economic sectors. migrants moved to San Diego. Both hotel occupancies and room Only because of natural increase rates are rising as visitor numbers from births has San Diego added rebound and attractions and event population recently by some 26,000- attendance increases. 27,000 per year. The result is an increasingly ethnic and culturally Population changes within San diverse mixture of younger age Diego County reflect diverging groups, while the average age for patterns. San Diego s population white residents continues to grow growth over the past decade slowed older. from previous eras, which at times was two to three times higher than With lowered levels of population current numbers despite a much growth resulting almost entirely larger population base now from babies, demands on additional (Figure 4). housing are somewhat muted, at least for now. Consumer sales, Migration the past several years business demands, and tax revenue shows almost as many residents increases are also moderated by this moved away as international type of population increase. Home prices appear to have bottomed and slightly risen throughout 2012. Further price increases are likely to be mixed, however, as the weak economy persists, employment opportunities are constrained, and foreclosures continue to work through the system. This trend will continue in 2013 with relatively small gains in number of units added to the housing supply. Non-residential real estate is similarly mending but a long way from full or healthy recovery. Office and industrial vacancies remain relatively high, but appear to be stabilizing among some key submarkets. Rents remain relatively flat in most markets, while others
still decline. Premium properties and accommodations increased jobs in key areas continue to attract the in 2012 (Figure 5). best demand with discounted rental rates. With slow but steady job While economic production is increases, demand for local space is improving, employment in San rising among office, industrial, and Diego, as in the rest of the nation, other commercial properties. remains far below pre-recession peaks. Between 2007 and 2010 Slowly Improving Employment San Diego lost 103,300 jobs. Since Outlook that time, approximately 51,000 jobs have been added through 2012, just Overall, employment trends show about half-way toward total recovery generally improving prospects in in job numbers. San Diego, particularly as sectors that had lost the most jobs have While San Diego exceeded relative started adding jobs again. For the gains in state and national jobs prior first time since the recession began, to the recession, in recovery San employment in construction, retail, Diego has more or less equaled the Fig. 6 Unemployment Rate in Comparison nation s job creation. California is yet to reach 2002 levels. Nearly every major industry category in San Diego added jobs during 2012, with the notable exceptions of manufacturing and wholesale trade. Shipbuilding and aerospace added some jobs, but significant losses recorded among computer and electronics employers dragged manufacturing job numbers down. Employment in wholesale trade also fell despite the local retail sector adding jobs. The strongest job growth continues to be in health care, administrative and support services, professional and technical services, as well as retail, restaurants, and hotels. After five consecutive years of job losses, with 40% of the jobs existing in 2006 being lost, construction started adding jobs again in 2012. Further increases are anticipated in 2013 with stirrings in both residential and commercial construction reviving. Source: e: estimate f: forecast. California Employment Development Department; Forecast by National University System Institute for Policy Research. Prior to the recession, San Diego s unemployment rate was generally lower than the rest of California and the U.S. unemployment rate started rising in California and San Diego 6
San Diego Economic Overview well before the rest of the nation. San Diego s unemployment rate continued rising above the national rate, although not as much as California s double-digit increase. As unemployment slowly comes back down, San Diego maintains more or less the same marginal position between U.S. and California rates (Figure 6). Fig. 7 Annual Percent Change In Taxable Sales Southern California Counties 7 San Diego s unemployment rate as of 2012 averages 9.0%. The rate should continue gradually improving to 8.5% over 2013, approaching but still not reaching expected U.S. levels, while remaining well below the rest of California. Improving Sales Activity Reflects Rising Consumer Prosperity Consumer spending in San Diego as measured by taxable sales is rising but still not regaining pre-recession levels. While rebounding from 2008-09 lows, adjusted for inflation sales remain lower than every previous year back to 1999 (Figure 7). One in seven San Diego business Source: California State Board of Equalization. p: preliminary, e: estimate, f: forecast by National University System Institute for Policy Research. outlets closed during the course of the recession. Since 2010, 4,500 outlets have been reopened or added, but still remain 8% lower than the number existing in 2006.
In 2010, San Diego led the rebound in taxable sales among southern California counties. Riverside, San Bernardino, and Orange County plunged deeper in 2009, and subsequently rebounded above San Diego s 2011 percentage increase. San Diego s sales increased at a faster pace in 2012, and are projected to tie with Orange County s increase in 2013, while exceeding the rest of California. Many factors influence spending consumer confidence level, availability of credit, inflation, and most importantly, employment. With the labor market gradually improving, spending is also increasing although gains are projected to slow. Continuing levels of high consumer debt will restrain greater spending. Rising inflation is also limiting spending gains, particularly as gas and energy prices soar. San Diego s cost of living accelerated from only 1.3% in 2010 to 3.0% in 2011, and 2.1% estimated in 2012. San Diego s inflation rate is forecasted to rise in 2013 to 2.4%. Guarded Outlook for 2013 Falling into recession for at least part of the year in 2013 is possible. The sluggish recovery could lapse with any number of shocks, from state and federal policy actions, such as the fiscal cliff and tax and regulatory increases. The slow growing economy reflects a lack of consumer confidence and continued business uncertainty stifles willingness to take on workers and greater expansion. In spite of these heightened cautions, the outlook for San Diego is continued albeit modest improvement in economic activity continuing through 2013. By Kelly Cunningham, Economist, Senior Fellow, National University System Institute for Policy Research www.nusinstitute.org. 8
San Diego Office Forecast 9
San Diego Office Forecast 11 Negotiating Power Will Shift in Central County The San Diego office market is a tale of three counties North, Central and South. Evaluating the performance of submarkets located in North and South Counties, the recovery does not feel as strong and optimistic as in submarkets located in the Central County. The annual leasing as measured by net absorption in Central County is far above the pre-recession levels recorded in 2006 and 2007; and is the same as during pre-recession years in North County and well below the pre-recession levels in South County. 1 As a result, the countywide office market performance seems good but not great. In 2013, the current trend - Central County leading the recovery - is expected to gain momentum resulting in a shift in negotiating power between landlords and tenants in the central core submarkets. The extent of improvements across all San Diego office submarkets in 2013 will depend heavily on Fig. 1 Net Change in Jobs by Industry Sector San Diego County, between Oct. 2011 & Oct. 2012 Mining & Logging Construction Manufacturing Wholesale Retail Transp. & Wareh. & Util. Information Financial Activ. Prof. & Bus. Serv. Educ. Serv. Health Care Leisure & Hosp. Other Serv. Govt. -4,000-2,000 0 2,000 4,000 6,000 8,000 10,000-1,900-1,400-600 Between October 2011 and October 2012, total nonfarm employment increased by 23,500 jobs, or 1.9%. Professional and business services posted the greatest year-over gain, adding 8,100 jobs. Administrative and support and waste services (up 6,300) contributed to more than 75% of the job growth in this sector. Professional, scientific, and technical services added 1,700 jobs, followed by a gain of 100 jobs in management of companies and enterprises. Nine other sectors also added jobs over the year. The notable came from leisure and hospitality (up 5,100); retail (up 5,400); educational and health services (up 4,100); and construction (up 3,100). Three industries reported year-over jobs losses: manufacturing (down 1,900), wholesale (1,400) and government (down 600). Source: U.S. Department of Labor, Bureau of Labor Statistics Labor Dept. improvements in the employment market and tenant confidence to make long-term leasing decisions. Despite the many concerns landlords and tenants are facing fiscal cliff, taxes, unresolved issues in Europe among many others the national and local employment markets continue to improve, albeit slowly. The San Diego office market is following the same trend, a slow and steady improvement, as evidenced by decreasing countywide 0 300 200 900 500 200 3,100 Industrial 3,600 5,400 5,100 8,100 Retail Medical Office Hotels Office vacancy and improved leasing. Further improvement depends heavily on job growth. Employment Forecast: San Diego s employment market has improved notably over the last year, adding a total of 23,500 jobs of which 8,100 were in professional and business services sector outpacing the total annual job growth in neighboring Southern California metros between October
2011 and October 2012 (Figure 1). 2 As a result, the unemployment rate in San Diego has dropped 1.2 percentage points to 8.6% over the last year compared to a one percentage point decrease in the national unemployment rate. 3 San Diego s total employment is forecasted to increase 1.7% in 2013. 4 All sectors except government and natural resources and mining are forecasted to add jobs in 2013 with growth rates ranging between 0.2% and 3.2%. Office employment is forecasted to grow 2.7% or 7,770 office jobs in 2013 (Figure 3). Financial Thousands of Jobs 25 20 15 10 5 0 (5) (10) (15) (20) (25) activities and professional and business services jobs the main office tenants are forecasted to grow 2.1% and 2.9% respectively. The countywide unemployment rate is forecasted to continue the downward trend in 2013, positively affecting office leasing. Leasing: Evaluating office leasing activity countywide for all classes in 2012 5, activity was the highest in Central County totaling 75% of the total SF leased countywide. North County accounted for 15% and South County for 10% of the total leases signed. 6 Fig. 2 Office Jobs in San Diego, CA MSA Net Change in Jobs Between 1993 and 2007 San Diego County added a total of 118,800 office jobs (annual average of 7,900 office jobs over 15 years). % Change Between 2008 and 2010 San Diego County lost a total of +11,600 +28,600 28,700 office jobs. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f San Diego-Carlsbad-San Marcos, CA Metropolitan Statistical Area (MSA). Office Jobs include Profesional & Business Services and Financial Activities Source: Moody s Analytics. (f) forecasted. Forecast last updated 9/20/2012 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% The top five most sought-after submarkets in 2012 based on leases signed were Sorrento Mesa, UTC, Mission Valley, Kearny Mesa and Carlsbad (Figure 4). These five submarkets combined accounted for 54% of the total SF leased in 2012. Top 10 submarkets combined accounted for 84% of the total leasing activity, indicating that of 32 office submarkets countywide, tenant demand is concentrated in the top 10. Eight of the top 10 submarkets are located in Central County. Central County: Leasing activity in Central County was led by Class A and B leasing. Class A leasing accounted for 46.2% and Class B for 46.1% of the total SF leased in 2012. As a result, Class A direct vacancy has decreased from 10.8% to 9.1% over the last year (3Q11-3Q12) and is currently below the seven-year average of 12.1%. Class B direct vacancy has decreased from 19.0% to 16.6% during the same time period and remains above the seven-year average of 15.3%. Overall direct vacancy rate in Central County for all classes was 12
San Diego Office Forecast Fig. 3 Employment Summary: San Diego-Carlsbad-San Marcos CA, MSA Employment Sector Current Employment* Total Employment % of Total Employment Number of Jobs Added or Lost inthousands** Annual Growth Rate (%) 2012 2013 2014 2015 2012 2013 2014 2015 Natural Res. & Mining 400 0.0% -0.01 0.00 0.00 0.00-1.4% -0.4% -0.1% 0.2% Construction 58,300 4.6% 0.93 1.71 2.92 3.41 1.7% 3.0% 5.0% 5.6% Manufacturing 90,900 7.2% -1.54 0.22 1.19 1.43-1.7% 0.2% 1.3% 1.5% Wholesale Trade 39,200 3.1% -2.19 0.06 0.50 0.71-5.4% 0.2% 1.3% 1.8% Retail Trade 138,100 10.9% 5.12 2.00 1.53 1.32 3.9% 1.5% 1.1% 0.9% Transp., Wareh., & Util. 27,000 2.1% 0.57 0.54 0.54 0.62 2.2% 2.0% 2.0% 2.2% Information 23,900 1.9% -0.48 0.17 0.45 0.60-2.0% 0.7% 1.9% 2.5% Financial Activ. 67,700 5.4% 1.53 1.45 1.17 1.84 2.3% 2.1% 1.7% 2.6% Prof. & Bus. Serv. 222,700 17.7% 6.24 6.25 7.98 9.84 2.9% 2.9% 3.6% 4.2% Educational Serv. 28,000 2.2% 1.16 0.61 0.71 0.94 4.3% 2.2% 2.5% 3.2% Health Care & Social Assist. 126,400 10.0% 4.04 4.11 4.48 5.23 3.3% 3.2% 3.4% 3.9% Leisure & Hospitality 161,600 12.8% 3.29 4.91 4.91 5.74 2.1% 3.1% 3.0% 3.4% Other Services 47,300 3.7% -0.01 0.87 0.73 0.90 0.0% 1.8% 1.5% 1.9% Government 230,100 18.2% -1.83-1.08 3.95 4.55-0.8% -0.5% 1.8% 2.0% Total Nonfarm Employment 1,261,600 100.0% 16.82 21.82 31.06 37.13 1.4% 1.7% 2.4% 2.9% * Current Employment as of October, 2012. Source the U.S. BLS and the Labor Market Information Division of the California EDD. **Moody s Analytics; economy.com; forecast last updated 9/20/2012. Office Employment Employment Sector Current Employment* Total Employment % of Total Employment Number of Jobs Added or Lost inthousands** Annual Growth Rate (%) 2012 2013 2014 2015 2012 2013 2014 2015 Financial Activ. 67,700 23.3% 1.53 1.45 1.17 1.84 2.3% 2.1% 1.7% 2.6% Prof. & Bus. Serv. 222,700 76.7% 6.24 6.25 7.98 9.84 2.9% 2.9% 3.6% 4.2% 13 Total Office - Using Employment 290,400 100.0% 7.77 7.70 9.15 11.68 2.8% 2.7% 3.1% 3.9%
Fig. 4 Top Office Submarkets By Leasing Activity San Diego County - All Classes Ranked by SF Leased - 2012YTD Highest Leasing Activity Rank Submarket 1 Sorrento Mesa 2 UTC 3 Mission Valley 4 Kearny Mesa 5 Carlsbad 6 Del Mar 7 Downtown 8 Eastgate 9 Rancho Bernardo 10 Torrey Pines 11 Scripps 12 Sorrento Valley 13 San Marcos 14 Encinitas 15 Sorrento Mesa 16 National City 17 Governor 18 Oceanside 19 Escondido 20 Solana Beach 13.1% as of 3Q12, 1.9 percentage points lower than a year ago and below the seven-year average of 13.6%. As the gap between Class A and Class B product continues to tighten supported by strong leasing velocity, expect to see an Source: Cassidy Turley San Diego. Transactions By Building Class Class Submarket A 46.3% B 44.3% C 7.4% Total 100% increase in asking rents in 2013. North County: Leasing activity in North County was also led by Class A and B leasing. Class A leasing accounted for 42.2% and Class B for 39.2% of the total SF leased in 2012. As a result, Class A direct vacancy has decreased from 23.6% to 19.2% over the last year (3Q11-3Q12) and is below the seven-year average of 20.8%. Class B direct vacancy has inched up from 24.0% to 24.6% during the same time period and is above the seven-year average of 20.3%. Overall direct vacancy rate in North County for all classes was 22.0% as of 3Q12, 1.6 percentage points lower than a year ago and above the seven-year average of 20.3%. Carlsbad, the largest North County office submarket (4.1 million SF) is expected to benefit from tightening supply in North County much sooner than other submarkets. The coastal corridor from Del Mar to Carlsbad is one of the County s historically strongest suburban office markets. Additionally, Carlsbad is strategically positioned to benefit from the high cost of space in Del Mar located in Central County and the endless stream of northbound tenants. Expect gradual improvements in leasing and occupancy throughout 2013 in North County. South County: Leasing activity in South County was led by Class 14
San Diego Office Forecast 15 A and B leasing. Class A leasing accounted for 53.1% and Class B for 39.0% of the total SF leased in 2012. As a result, Class A direct vacancy has decreased from 19.2% to 17.6% over the last year (3Q11-3Q12) and remains above the seven-year average of 17.3%. Class B direct vacancy has increased from 19.7% to 20.3% during the same time period and is above the seven-year average of 15.7%. Overall direct vacancy rate in South County for all classes was 18.4% as of 3Q12, 0.3 percentage points higher than a year ago and above the seven-year average of 15.1%. Downtown, the largest South County submarket (9.9 million SF), continues to struggle with a high vacancy rate and is exposed to a substantial amount of tenant lease expirations within the next three years. Between four tenants Sempra, The City of San Diego, Liberty Mutual and ESET we will see a total of over 950,000 SF of tenant rollover. The largest landlord, Irvine Company, owner of six of the 11 downtown San Diego Class A buildings, remains an aggressive, well-funded owner and offers Thousands of SF Fig. 5 Key Office Lease Transactions 2012 YTD Property SF Tenant Transaction Type Submarket Multiple Buildings* 270,343 Qualcomm Inc. New & Renewal Sorrento Mesa Bridge Pointe Corporate Centre II 94,543 ServiceNow, Inc. New Eastgate Innovation Corporate Center 69,362 EnXco, Inc. Expansion Rancho Bernardo Corporate Plaza I 69,000 Latham & Watkins LLP New Del Mar Centerside I 54,728 United Healthcare Renew Mission Valley *Sorrento Towers North - West, 119,381 SF. Renewal ~ San Diego Tech Center, 76,404 SF; New ~ Scripps Wateridge Corporate Plaza, 74,558 SF. Source: Cassidy Turley San Diego. 2012YTD as of 3Q12. 3,500 2,500 1,500 500 (500) (1,500) Fig. 6 Net Absorption vs. Completions San Diego County Office, All Classes excl. Sublease Net Absorption 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f generous tenant improvements, leasing incentives and concessions in an effort to attract, retain, relocate and/or grow their existing tenant base. Competition for quality Total Completions Source: Cassidy Turley San Diego. (e) estimated; (f) forecasted by Cassidy Turley San Diego & The Corky McMillin Center for Real Estate. tenants will only increase in 2013. Net Absorption: Countywide annual net absorption for all classes was 460,958 SF as of 3Q12
Fig. 7 Office Projects Under Construction San Diego County Office, All Classes, as of Nov. 2012 Property SF Address Class Submarket La Jolla Commons II 417,000 4707 Executive Dr. A UTC FBI San Diego 248,882 10385 Vista Sorrento Pky. A Sorrento Mesa La Jolla Corporate Campus - Illumina Flower Hill Professional Center 123,429 5200 Research Pt. A UTC 63,941 2600 Via De La Valle A Del Mar Tri-City Medical 57,476 4002 W Vista Way A Oceanside Quail Garden Corporate Center 33,000 662 Encinitas Blvd. B Encinitas Source: Cassidy Turley San Diego & CoStar Group Inc. compared to 260,876 SF at the the 5,000 to 20,000 SF range will professional and business services same time last year. 7 continue to be the main drivers of sectors. While not all of the current leasing activity, with Class A leading tenants in the market will transact To put these numbers in the way followed by the well located in 2013, leasing activity is set to be perspective, the annual net Class B buildings, continuing the positive supported by limited new absorption before recession post-recession trend. The current construction and improved hiring. averaged at 997,000 SF and Class A net absorption levels are at during recession tenants returned 87% of the pre-recession levels. Future Inventory: Limited new an average of 633,000 SF. The construction countywide has annual net absorption averaged Tenants currently in the market are played an important role in the 646,000 SF in post-recession years looking for 2.5 million SF over the current office market recovery (2010 and 2011) which means the next 24 months with 1.7 million by enabling the office market to current net absorption levels are at SF in Central and South Counties regain its footing. Of six projects 65% of the pre-recession levels. In combined and 800,000 SF in totaling 943,728 SF currently 2013, countywide net absorption North County. The most active under construction combined, for all classes is expected to be tenants countywide are from the four projects or 853,252 SF are slightly over 600,000 SF (Figure 6). technology, life sciences, financial 100% pre-leased (Figure 7). While Flight-to-quality and renewals within activities, educational services, and developers are breaking ground 16
San Diego Office Forecast on build-to-suit projects, the consensus is that a majority of the developers are evaluating building speculative office space but are not ready to take the risk. Fig. 8 Vacancy Rate San Diego County Office, All Classes Vacancy: Total Countywide total vacancy for all classes, including sublease space, was 18.1% in the third quarter, 3.5 percentage points lower than the peak rate of 21.6% recorded at the end of the recession (3Q09). The countywide total vacancy is forecasted to decrease from an average annual percentage of 18.0% in 2012 to 17.4% by the end of 2013, but will remain above the 10-year average of 16.4% (Figure 8). Total vacancy ranges between 8% and 39.3% across 32 office submarkets indicating that the negotiating power varies by submarket. 8 Source: Cassidy Turley San Diego. 10-Year Average (2003-2012). (e) estimated; (f) forecasted by Cassidy Turley San Diego & The Corky McMillin Center for Real Estate. Fig. 9 Direct Vacancy Rate by Class San Diego County Office, excl. Sublease 17 Direct The countywide direct vacancy rate is forecasted to decrease from 15.2% in 2012 to 14.8% by the end of 2013 and will remain above the 10-year average of 13.0% (Figure 8). By Class Class A leasing has Source: Cassidy Turley San Diego. 2012YTD as of 3Q12.
been positive for 13 consecutive quarters (3Q09-3Q12) during which a combined 2.7 million SF have been absorbed countywide. As a result, Class A direct vacancy has recorded the most improvements since the end of the recession by decreasing 6.9 percentage points to 12.1% (3Q12). The current Class A direct vacancy is below the 8-year average of 13.7%. Note that direct Class A vacancy is as tight as 1.1% in Eastgate and as high as 40.7% in Chula Vista-East; however, the top 10 tightest Class A submarkets are located in Central County and all recorded below 10% direct vacancy in 3Q12. Class B vacancy has decreased 0.1 percentage points to 18.5% and Class C vacancy has increased 2.4 percentage points to 15.6% since the end of the recession (2009). It will take several years for Class B and C vacancy rates to fall below the 8-year average of 14.8% and 12.1% respectively (Figure 9). Asking Rents: The overall countywide monthly average asking rent for all classes was $2.23 per month full service (FS) Fig. 10 Weighted Average Monthly Asking Rent (FS) San Diego County Office, All Classes Source: Cassidy Turley San Diego. (e) estimated; (f) forecasted by Cassidy Turley San Diego & The Corky McMillin Center for Real Estate. in 3Q12 which is 12% below the pre-recession annual average. Year-over-year (3Q12 vs. 3Q11), average countywide rent increased $0.02, indicating that rents have stabilized across all classes. The current Class A average asking rent at $2.68 per month FS and is 9% below the pre-recession average yet has increased 3.5% from last year (3Q11). As the Class A market approaches peak rents, tenants will shift focus to well-located Class B buildings. Class B and C asking rents have remained unchanged from a year ago. However, as Class A supply continues to tighten in 2013 and begins to justify an increase in Class A rents beyond core submarkets, demand for Class B space is bound to increase driven by tenants priced out of the Class A market. Overall countywide average rent is expected to increase between 2% and 3% in 2013 supported by healthy leasing activity led by 18
San Diego Office Forecast 19 Central County as well as limited new construction (Figure 10). Some of the county s largest landlords have already been increasing rents slightly since the beginning of 2012, a trend that is expected to strengthen in 2013 (Figure 11). Conditions for landlords of the best buildings located in prime submarkets will be much more favorable than the conditions for landlords of older office buildings located in secondary submarkets. Understandably, recovery does not feel tangible when the landlord is struggling to retain tenants in a flight-to-quality market. Many existing older buildings will need to increase efficiencies and retrofit new systems in order to compete effectively. While concessions have peaked in most submarkets, tenants still have an opportunity to take advantage of reduced concessions, with the exception of Del Mar Heights and surrounding prime submarkets. In the prime submarkets, the window of opportunity for tenants to secure the best deals in the best buildings Fig. 11 Top 10 Largest Office Landlords & Tenants in 2012 San Diego County Top 10 Landlords Rank Landlord 1 The Irvine Company 2 Kilroy Realty Corporation 3 The Blackstone Group 4 Arden Realty, Inc. 5 RREEF America 6 Alexandria Real Estate Equities, Inc. 7 TA Associates Realty 8 Hines 9 Prudential Real Estate Investors 10 MIG Real Estate Rankings based on SF representation. Source: Cassidy Turley San Diego & CoStar Group Inc. is closing, a trend that is expected to strengthen in Central County. For other submarkets, dynamic change will come to the market when mid-size and smaller companies, representing the majority of office tenants in San Diego, feel more confident about making real estate decisions. Sales Activity: The total sales volume of office properties of all sizes countywide was $1,148.3 million in 2012, a 10.5% decrease compared to 2011. 9 Top buyers in San Diego County in 2012 based on total sales volume were BCL Inc., Top 10 Tenants Rank Tenants 1 Qualcomm, Inc. 2 City of San Diego 3 SONY 4 Motorola 5 AT&T 6 Cardinal Health, Inc 7 Sempra Energy 8 Bridgepoint Education 9 GEICO 10 ResMed Inc. Beacon Capital Partners, Emmes Asset Management Company, Cruzan Monroe & Cigna, The Irvine Company, and Lincoln Property Company (Figure 12). Top sellers were TA Associates, Pacific Office Properties, MPG Office Trust Inc., GE Investment Corporation, Wereldhave USA, Inc., TIAA-CREF, and Nomura CDO. The average price per-square-foot was $249 in 2012 compared to $221 in 2011. The average cap rate increased slightly to 7.61% in 2012 from 6.84% recorded in 2011. In 2013, the demand for Class A
Fig. 12 Key Office Sale Transactions 2012YTD Property SF Seller/Buyer San Diego Tech Center 641,693 Columbia Center 553,715 DiamondView Tower 306,750 Centerside I 202,913 600 B Street 359,218 MPG Office Trust Inc./ Beacon Capital Partners GE Investment Corporation / Emmes Asset Management Company Wereldhave USA, Inc. / Cruzan Monroe & CIGNA TIAA - CREF / The Irvine Company Nomura CDO / Lincoln Property Company Transaction Amount Submarket $152,500,000 Sorrento Mesa $135,000,000 Downtown $121,000,000 Downtown $52,000,000 Mission Valley $49,000,000 Downtown Source: Cassidy Turley San Diego. 2012YTD as of 3Q12. assets with well-positioned quality tenants in place will continue to outpace supply. The lack of available product will keep the lid on transaction volume instead of a lack of available capital. In the short-term (2013), recovery will be more evident in prime Central County submarkets such as Del Mar Heights, Sorrento Mesa, UTC, Kearny Mesa and Mission Valley, while other submarkets such as a majority of the South County submarkets, will remain in status quo throughout 2013. Consequently, overall office market performance will remain mixed as it will be well into 2014 before the recovery is felt in all submarkets across the county. The next year will be about gaining leasing traction and working on strengthening market fundamentals while adjusting to a decreasing average tenant footprint. More evident improvement and growth across all submarkets is expected in 2014 and 2015. 1. Pre-recession 2006 & 2007; recession 2008 & 2009; postrecession 2010 & 2011. Cassidy Turley San Diego. Based on net absorption. 2. U.S. Department of Labor, Bureau of Labor Statistics Labor Dept. November 16, 2012. 3. www.bls.gov San Diego: October 2011 vs. October 2012. National: November 2011 vs. November 2012 4. Moody s Analytics; economy.com; forecast last updated 9/20/2012. 5. Based on Cassidy Turley San Diego lease comparables total SF leased as of 12-6-2012 6. Based on lease comparables from 1-1-2012 to 12-7-2012. 7. Cassidy Turley San Diego tracks office inventory quarterly that includes multi-tenant and single tenant buildings. Government and medical buildings are not included. 8. Data as of 3Q12. 9. Real Capital Analytics, Inc. Based on properties and portfolios$5 million and greater. 20
San Diego Industrial Forecast 21
San Diego Industrial Forecast 23 Uptick in Demand Expected in 2013 The U.S. economy has been growing at an average annual pace of 2.2% in 2012 and is forecasted to grow 1.4% in 2013. 1 The local economy has been growing at an average annual pace of 1.7% in 2012 and is forecasted to grow 1.5% in 2013. 2 The San Diego industrial market has been improving in parallel with the national and local economies and is expected to stay on course while maintaining moderate yet steady improvements in 2013. Progress in the first half of 2013 is anticipated to be more subdued compared to the second half of the year as businesses/tenants receive more certainty around the future tax liabilities. Some indicators tracking the U.S. economy and directly affecting the demand for industrial space nationally and locally have improved in 2012; however, some indicators have not progressed. Consumer Confidence: All three major indexes measuring consumer 60 55 50 45 40 35 30 Fig. 1 Institute of Supply Management (ISM) Index Nov-07 Feb-08 May-08 Aug-08 Mining & Logging Construction Manufacturing Wholesale Retail Transp. & Wareh. & Util. Information Financial Activ. Prof. & Bus. Serv. Educ. Serv. Health Care Leisure & Hosp. Other Serv. Govt. Expansion Contraction Nov-08 Feb-09-1,900 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Source: Institute for Supply Management. http://www.ism.ws/index.cfm Fig. 2 Net Change in Jobs by Industry Sector San Diego County, between Oct. 2011 & Oct. 2012-4,000-2,000 0 2,000 4,000 6,000 8,000 10,000-1,400-600 0 300 200 900 500 200 3,100 Industrial 3,600 5,400 5,100 May-11 Aug-11 Nov-11 8,100 Feb-12 Retail Medical Office Hotels May-12 Aug-12 Nov-12 Office Between October 2011 and October 2012, total nonfarm employment increased by 23,500 jobs, or 1.9%. Professional and business services posted the greatest year-over gain, adding 8,100 jobs. Administrative and support and waste services (up 6,300) contributed to more than 75% of the job growth in this sector. Professional, scientific, and technical services added 1,700 jobs, followed by a gain of 100 jobs in management of companies and enterprises. Nine other sectors also added jobs over the year. The notable came from leisure and hospitality (up 5,100); retail (up 5,400); educational and health services (up 4,100); and construction (up 3,100). Two industries reported year-over jobs losses: manufacturing (down 1,900) and government (down 600). Source: U.S. Department of Labor, Bureau of Labor Statistics Labor Dept.
confidence, including the benchmark Consumer Confidence Index, the Fig. 3 Industrial Jobs in San Diego, CA MSA Present Situation Index and the Expectations Index, reported an improvement in November 2012. The Consumer Confidence Index increased to 73.7 from 73.1 in October and is now at its highest level in more than 4.5 years (76.4 Feb. 2008). 3 Thousands of Jobs 10 5 0 (5) Net Change in Jobs % Change +2,832 +4,116 8% 6% 4% 2% 0% -2% -4% Retail Sales: Retail and food services sales were up 3.7% in November 2012 compared to last year. 4 Note that consumer spending accounts for 70% of all economic activity nationwide and retail sales account for one third of the 70%. 5 Retail sales are closely linked to the demand for distribution centers. ISM Index: Economic activity in the manufacturing sector contracted in November following two months of modest expansion, while the overall economy grew for the 42 nd consecutive month. The index registered 49.5%, a decrease of 2.2 percentage points from October s reading of 51.7%, indicating contraction in manufacturing for the fourth time in the last six months (Figure 1). A reading above 50% (10) (15) Between 1994 and 2001 San Diego County added a total of 24,712 industrial jobs (an annual average of 3,089 industrial jobs over 8 years) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting. This month s index reflects the lowest level since July 2009. 6 Seven industries reported growth in new orders and nine reported a decrease in November. The jury is still out in terms of which direction the index will move next and what effects the slowdown of economic activity in the manufacturing sector will have on San Diego s industrial market. In San Diego, the most closely -14,426-16,050 San Diego-Carlsbad-San Marcos, CA Metropolitan Statistical Area (MSA). Industrial Jobs include Manufacturing & Wholesale Trade. -3,126 Source: Moody s Analytics. (f) forecasted. Forecast last updated 9/20/2012. -6% -8% -10% watched indicator is employment as demand for commercial real estate including industrial space is the most influenced by improvements in local employment among other factors. Employment Forecast: San Diego s employment market has improved notably over the last year, adding a total of 23,500 jobs of which 8,100 were in the professional and business services sector outpacing the total annual job growth in neighboring Southern California metros between October 2011 and October 2012 (Figure 2). 7 As 24
San Diego Industrial Forecast 25 a result, the unemployment rate in San Diego has dropped 1.2 percentage points to 8.6% over the last year compared to one percentage point decrease in the national unemployment rate. 8 San Diego s total employment is forecasted to increase 1.7% in 2013. 9 All sectors except government, natural resources and mining are forecasted to add jobs in 2013 with growth rates ranging between 0.2% and 3.2%. Industrial employment is forecasted to grow 0.2% in 2013 (Figure 3). Manufacturing and wholesale trade the primary industrial tenants are forecasted to grow slightly at the same speed of 0.2%. The countywide unemployment rate is forecasted to continue the downward trend in 2013. Leasing: Evaluating industrial leasing activity countywide for all product types in 2012 10, activity was the highest in Central County totaling 46% of the total SF leased countywide. North County accounted for 34.7% and South County for 18.7% of the total leases signed. The top five most sought-after submarkets in 2012 were Otay Mesa, Vista, Miramar, Carlsbad and Sorrento Mesa (Figures 4 and 5). These five submarkets combined accounted for Fig. 4 Top Industrial Submarkets By Leasing Activity San Diego County - All Classes Ranked by SF Leased - 2012YTD Highest Leasing Activity Rank Submarket 1 Otay Mesa 2 Vista 3 Miramar 4 Carlsbad 5 Sorrento Mesa 6 Kearny Mesa 7 East County 8 San Marcos 9 Escondido 10 Oceanside 11 Poway 12 Sorrento Valley 13 Chula Vista 14 Rancho Bernardo 15 Scripps 16 National City 17 Carmel Mountain 18 Morena 19 Downtown 20 Mission Valley 60.6% of the total SF leased in 2012. Top 10 submarkets combined accounted for 85.9% of the total leasing activity, indicating that of 25 industrial submarkets countywide, tenant demand is concentrated in the top 10 submarkets. The most space (68% of the total SF leased) in 2012 was leased by tenants representing manufacturing, wholesale, technology and Transactions By Building Class Class Submarket R&D 36.5% MFG 23.6% IMT 23.0% DIST 11.1% Other 5.9% Total 100% Source: Cassidy Turley San Diego. 2012YTD as of 12/10/12. transportation, warehousing and utilities industry sectors. In 2013, expect the best demand to come from tenants representing growing San Diego industries such as life science, clean tech, wireless communications, medical device and action sports/lifestyle among others. North County: Leasing activity in North County was led by
manufacturing tenants accounting for 44% of the total space leased in 2012. Distribution space accounted for 22%, R&D accounted for 20% and IMT accounted for 12% of the total SF leased in 2012. The overall direct vacancy rate in North County for all product types was 8.7% (3Q12) compared to 11% last year (3Q11), and is below the seven-year average of 9.6%. Leasing activity as measured by net absorption has been positive for the last three years. Tenants absorbed 836,000 SF in the first three quarters of 2012, a level not seen since 2007. Current annual absorption is at 85% compared to an annual average of 984,000 SF during the pre-recession years (2006 and 2007). absorbed 652,000 SF in the first three quarters of 2012. Current annual absorption is at 63% compared to an annual average of 1.03 million SF during the prerecession years (2006 and 2007). South County: Leasing activity in South County was led by distribution space accounting for Property SF Tenant Transaction Type Submarket Siempre Viva Business Park Bldg. 9 257,972 Imperial Toys New Otay Mesa Siempre Viva Business Park Bldg. 14 124,068 Pacific World Corporation New Otay Mesa Oak Ridge Corporate Centre 120,221 SAIC Renew Vista Rancho Bernardo Distribution Center Fig. 5 Key Industrial Leases 2012YTD 78,744 Cymer, Inc. Expansion Rancho Bernardo 10277 Scripps Ranch Blvd. 69,900 CoreLogic Solutions, LLC New Scripps Ranch Source: Cassidy Turley San Diego. 2012YTD as of 3Q12. Fig. 6 Net Absorption vs. Completions San Diego County Industrial, All Product Types excl. Sublease Net Absorption Annual Completions Central County: Leasing activity in Central County was led by R&D (34% of the total) followed by distribution space (30%), manufacturing space (14%) and IMT space (13%) in 2012. The overall direct vacancy rate in Central County for all product types was 8.1% (3Q12) compared to 8.7% last year (3Q11), yet remains above the seven-year average of 7.3%. Leasing activity as measured by net absorption has been positive for the last three years. Tenants Thousands 6,000 4,000 2,000 0-2,000-4,000-6,000 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f Source: Cassidy Turley San Diego. (e) estimated; (f) forecasted by Cassidy Turley San Diego. 26
San Diego Industrial Forecast Fig. 7 Direct Vacancy Rate San Diego County Industrial, All Product Types year (3Q11), yet remains above the seven-year average of 11.1%. 14% 12% 10% 8% 6% 9-Yr Total Vacancy incl. Sublease Avg. 9.8% 8.0% 7.0% 12.7% 10.6% 11.9% 10.1% 11.2% 9.8% 10.5% 8.8% 9.2% 7.5% Leasing activity as measured by net absorption has been positive for the last three years. Tenants absorbed 387,000 SF in the first three quarters of 2012. Current annual absorption is at 65% compared to an annual average of 591,000 SF during the pre-recession years (2006 and 2007). 4% 15% 10% 5% 0% 9-Yr Average 8.3% (2004-2012) 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013 Source: Cassidy Turley San Diego. (e) estimated; (f) forecasted by Cassidy Turley San Diego Fig. 8 Direct Vacancy Rate by Product Type San Diego County Industrial, excl. Sublease 6.5% 6.4% 8.8% 5.0% R&D MFG IMT DIST 13.2% 12.0% 11.9% 8.0% 7-Yr Direct Vacancy Avg. R&D 11.1%; MFG 6.5%; IMT 9.5%; DIST 9.8% 11.9% 10.0% 9.0% 6.5% 2006 2007 2008 2009 2010 2011 2012YTD Source: Cassidy Turley San Diego. 2012YTD as of 3Q12. Net Absorption: Countywide annual net absorption for all product types was 1.9 million SF as of 3Q12 compared to negative 1,087 SF the same time last year. 11 Countywide net absorption has been positive for five consecutive quarters, averaging 570,000 SF per quarter. To put these numbers in perspective, the annual net absorption before the recession averaged at 2.8 million SF and during the last recession tenants returned an average of 1.9 million SF. The annual net absorption averaged 831,000 SF in post-recession years (2010 and 2011) which means the current net absorption levels are at 67% of the pre-recession levels. In 2013, countywide net absorption 27 81% of the total SF leased in 2012. Manufacturing space accounted for 8% and IMT for 5%. The overall direct vacancy rate in South County for all product types was 11.2% (3Q12) compared to 12.3% last for all classes is expected to be slightly over 2.2 million SF (Figure 6). Flight-to-quality and renewals within
the 5,000 to 30,000 SF range will continue to be the main drivers of leasing activity, with manufacturing space leading the way. Tenants will continue to take advantage of current market trends by upgrading their facility to larger, higher-quality spaces or prime locations, or both. The majority of the industrial inventory in San Diego was built before 2000 leaving tenants with a relatively limited supply of new buildings. Tenants currently in the market are looking for more than 4.7 million SF countywide, with 2.6 million SF in North County and 2.1 million SF in the Central and South Counties combined over the next 24 months. The most active tenants countywide are from the local businesses representing manufacturing, life science, transportation, warehousing and utilities industry sectors. Currently, there are 47 tenants in the market looking for manufacturing space accounting for 40% of the total SF requirement. While not all of the current tenants in the market will transact in 2013, leasing activity is set to be positive supported by lack of new construction and improved hiring. Future Inventory: Limited new Fig. 9 Total Vacancy Rates as of 3Q12 Select West Coast Markets, All Product Types, incl. Sublease Orange County** Salt Lake City San Francisco Los Angeles San Jose Albuquerque Denver Portland* Oakland/East Bay San Diego Phoenix Las Vegas Sacramento construction countywide has played an important role in the current industrial market recovery by enabling the industrial market to regain its footing. There are no projects scheduled for completion in 2013 as the new speculative construction remains at a standstill (Figure 6). The consensus is that developers are not ready to build unless there is a committed tenant. Vacancy: The countywide total vacancy for all product types, including sublease, was 10.5% in the third quarter. Vacancy has been decreasing for five consecutive quarters and is currently 2.2 10.5% 0% 5% 10% 15% Source: Cassidy Turley. *Portland-Vancouver-Beaverton, OR-WA. **Anaheim - Santa Ana, CA. percentage points lower than the peak rate of 12.7% recorded in 4Q09. The countywide total vacancy is forecasted to decrease further from 10.5% in 2012 to 9.2% by the end of 2013 and is expected to fall below the 10-year average of 9.8% (Figure 7 and 9). 12 By Product Type Since the end of the recession (2009), countywide annual net absorption has been positive for all product types except for R&D, which slightly dipped into the red in 2011. As a result, all product types have recorded decreasing vacancy. Direct vacancy has decreased 3.0 28
San Diego Industrial Forecast 29 percentage points for IMT, 1.9 percentage points for distribution, 1.5 percentage points for manufacturing, and 1.3 percentage points for R&D from 2009 to 2012. Furthermore, direct vacancy for IMT space decreased to below the seven-year average in 2012. Direct vacancy for manufacturing space was the same as the seven-year average as of 3Q12, indicating that demand has recovered quite nicely (Figure 8). Asking Rents: Over the last 10 quarters, the countywide monthly asking rent for all product types has remained stable between $0.79 and $0.81 per month per square foot triple net (NNN). Countywide average asking rent was $0.79 as of 3Q12 which is 15% below the prerecession annual average and 10% below the 9-year average of $0.88 (Figure 10). The average monthly rent in Central County was $0.94, 25% higher than North County ($0.75) and 67% higher than South County ($0.56) as of 3Q12. While concessions have peaked in most submarkets, tenants still have an opportunity to take advantage of reduced concessions, with the exception of the prime buildings located in the prime submarkets where concessions $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 Fig. 10 Weighted Average Monthly Asking Rent (NNN) San Diego County Industrial, All Product Types excl. Sublease $0.89 $0.94 $0.90 $0.95 have been reduced. The window of opportunity for tenants to secure the best/bargain deals in the best buildings is closing, a trend that is $0.98 $0.89 $0.81 9-Yr Avg. Monthly Asking Rent for All Product Types $0.88 Triple Net (NNN) PSF (2004-2012) $0.79 $0.79 expected to strengthen in 2013. As supply of quality buildings continues to tighten, landlords $0.81 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f Source: Cassidy Turley San Diego. e) estimated; (f) forecasted by Cassidy Turley San Diego. Fig. 11 Top 10 Largest Industrial Landlords & Tenants in 2012 San Diego County All Product Types Ranked by SF Top 10 Landlords Rank Landlord 1 H.G. Fenton Company 2 Hamann Companies 3 RREEF America LLC 4 LBA Realty Alexandria Real Estate 5 Equities, Inc. 6 Goodrich Corporation 7 General Atomics 8 BioMed Realty L.P. 9 Public Storage, Inc. 10 Qualcomm Incorporated Top 10 Tenants Rank Tenant 1 factory 2-U Life Technologies 2 Corporation 3 Price Self Storage 4 Sharp HealthCare Source: Cassidy Turley San Diego. 2012YTD as of 12/10/12. 5 Hobie Cat Company 6 Public Storage 7 MOR Furniture For Less, Inc. 8 Polaris Pool Systems, Inc. 9 Sears Appliance Outlet 10 Isis Pharmaceuticals, Inc.
Property SF Seller/Buyer Price Submarket San Diego Tech Center 641,693 Sorrento Business Complex / One Technology Place Fig. 12 Key Industrial Sales 2012YTD 562,309 Research Center Pointe 119,561 Loker Corporate Center 123,454 9115 Activity Road 85,180 of these buildings will be wellpositioned to lead the rent recovery in 2013 (Figure 10). Consequently, conditions for the landlords of the best assets located in prime submarkets will be much more favorable in 2013 than the conditions for landlords of older industrial buildings located in secondary submarkets. Many existing older buildings will need to increase efficiencies and retrofit new systems in order to compete effectively. Sales Activity: The total sales volume of Industrial countywide was $457.9M in 2012, a 12.7% increase compared to 2011. 13 Industrial properties are increasingly attractive to investors due to improved leasing and lack of new supply. Top buyers in San Diego County in 2012 based on total sales volume were H.G. Fenton Company, Angelo, Gordon & Co., Charter Hall Office REIT / Beacon Capital Partners Collins Asset Management Group / Parallel Capital Partners Faraday Pointe CA LLC / Paragon Real Estate Investments Black Box Distribution / BLT Enterprises Miramar Activity Corporation / KEIRE SDA, LLC Source: Cassidy Turley San Diego. 2012YTD as of 3Q12. $152,500,000 Otay Mesa $53,390,779 Otay Mesa $13,425,000 Vista $11,500,000 Rancho Bernardo $10,171,600 Scripps Ranch SR Commercial, Monica H Penner, Beacon Capital Partners, Providence Capital Group Inc., David and Yael Alpert, 2011 Elihu Family Trust, Steven M Muskal, Archie Kuehn (Figure 12). Top sellers were Collins Asset Management Group, Venture Corporation, Ryan Companies US, Inc. Average price per-square-foot was $99 in 2012 compared to $97 in 2011 and the average cap rate was 8.54% in 2012 compared to 7.61% in 2011 In 2013, the demand for Class A assets with well-positioned quality tenants in place in high-traffic submarkets will continue to outpace supply. The lack of available product will keep the lid on investment transaction volume instead of a lack of available capital. 2013 is shaping up to be all about gaining leasing momentum and strengthening market fundamentals as we move beyond the preelection caution and companies begin to focus on long-term facility solutions. A lack of new construction countywide will continue to play an important role in the San Diego industrial market recovery. Dynamic change will come to the market when mid-size and smaller companies, representing the majority of industrial tenants in San Diego, feel more confident about making real estate decisions. 1. 2013 Economic Outlook by Wells Fargo. December 13, 2012. 2. National University System Institute for Policy Research. 3. The Conference Board Leading Economic Index (LEI), November 21, 2012. http://www.conference-board.org/ data/bcicountry.cfm?cid=1 4. U.S. Department of Commerce, December 13, 2012. http://www.census.gov/cgi-bin/briefroom/briefrm 5. The Secrets of Economic Indicators by Bernard Baumohl. Wharton School Publishing. 2005. 6. http://www.ism.ws/ismreport/mfgrob.cfm 7. U.S. Department of Labor, Bureau of Labor Statistics Labor Dept. November 16, 2012. 8. www.bls.gov San Diego: October 2011 vs. October 2012. National: November 2011 vs. November 2012 9. Moody s Analytics; economy.com; forecast last updated 9/20/2012. 10. Based on Cassidy Turley San Diego lease comparables total SF leased as of 12-6-2012 11. Cassidy Turley tracks industrial inventory that includes multi-tenant, single tenant and owner-occupied buildings over 10,000 SF, except in select submarkets where the competitive set requires the inclusion of smaller buildings. 12. Data as of 3Q12. 13. CoStar Group, Inc. and Real Capital Analytics, Inc. 30
San Diego Retail Forecast 31
San Diego Retail Forecast 2013 Leasing Activity: Positive But Sluggish The extent of improvements in the San Diego retail market in 2013 will depend heavily on improvements in the employment market and consumer spending, which accounts for 70% of all economic activity nationwide. 1 Employed, confident and optimistic consumers are a must for the retail market recovery on both the national and local levels. The 2013 forecast remains cautious, considering the political and economic uncertainty including the concerns about the fiscal cliff s impact on consumer spending. Mining & Logging Construction Manufacturing Wholesale Retail Transp. & Wareh. & Util. Information Financial Activ. Prof. & Bus. Serv. Educ. Serv. Health Care Leisure & Hosp. Other Serv. Govt. Fig. 1 Net Change in Jobs by Industry Sector San Diego County, between Oct. 2011 & Oct. 2012-4,000-2,000 0 2,000 4,000 6,000 8,000 10,000-1,900-1,400-600 0 300 200 900 500 200 3,100 Industrial 3,600 5,400 5,100 8,100 Retail Medical Office Hotels Office Between October 2011 and October 2012, total nonfarm employment increased by 23,500 jobs, or 1.9%. Professional and business services posted the greatest year-over gain, adding 8,100 jobs. Administrative and support and waste services (up 6,300) contributed to more than 75% of the job growth in this sector. Professional, scientific, and technical services added 1,700 jobs, followed by a gain of 100 jobs in management of companies and enterprises. Nine other sectors also added jobs over the year. The notable came from leisure and hospitality (up 5,100); retail (up 5,400); educational and health services (up 4,100); and construction (up 3,100). Three industries reported year-over jobs losses: manufacturing (down 1,900), wholesale (1,400) and government (down 600). Source: U.S. Department of Labor, Bureau of Labor Statistics Labor Dept. 33 Consumer Confidence: The good news is that based on recent economic data Americans are gaining faith in the recovery and are anticipating that the economy will continue to modestly expand throughout 2013. 2 All three major indexes measuring consumer confidence reported an improvement in November: the benchmark Consumer Confidence Index, the Present Situation Index and the Expectations Index. The Consumer Confidence Index increased in November to 73.7 from 73.1 in October and is now at its highest level in more than four and a half years (76.4 Feb. 2008). Consumers have grown increasingly more upbeat about the current and expected state of the job market over the past few months, and this turnaround in sentiment is helping to boost confidence. 3 Employment Forecast: San Diego s employment market has improved notably over the last year, adding a total of 23,500 jobs of which 5,400 were in the retail sector outpacing the total annual job growth in neighboring Southern California metros between October 2011 and October 2012 (Figure 1 and 2). 4 As a result, the unemployment rate in San Diego has dropped 1.2 percentage points to 8.6% over the last year compared to one percentage point decrease in the national unemployment rate. 5 San Diego s total employment is forecasted to increase 1.7%
60,000 50,000 40,000 30,000 20,000 10,000 Fig. 2 Net Change in Jobs in Southern CA Between Oct. 2011 & Oct. 2012 0 1.9% 23,500 in 2013. 6 All sectors except 1.5% 20,500 government, natural resources and mining are forecasted to add jobs in 2013 with growth rates ranging between 0.2% and 3.2%. Retail employment is forecasted to grow 1.5% in 2013 (Figure 3). The countywide unemployment rate is forecasted to continue the downward trend in 2013, positively affecting local retail sales(figure 4). Retail Tenants & Shopping Trends: Evaluating national sales total 1.5% 57,800 7,300 San Diego Orange County Los Angeles Riverside & San Bernardino Counties Between October 2011 and October 2012, nonfarm employment in San Diego increased by 23,500 jobs, or 1.9%. In Santa Ana-Anaheim-Irvine (Orange County), nonfarm employment increased by 20,500 jobs or 1.5%. In Riverside, total nonfarm employment increased by 7,300 jobs, or 0.6%. In Los Angeles, nonfarm employment increased by 57,800 jobs, or 1.5%. In comparison, national nonfarm employment increased by 1,949,000 or 1.5% and California s nonfarm employment increased by 295,300 jobs, or 2.1%. Source: U.S. Department of Labor, Bureau of Labor Statistics Labor Dept. Los Angeles* - Los Angeles-Long Beach-Glendale, CA. 0.6% dollars spent across all retail sectors, consumers are spending the most on their cars, food and beverages, general everyday merchandise and gas (Figure 5). Comparing the change in total dollars spent in 2012 to 2011, consumers are spending more on gas, non-store retailers (services), furniture, sporting goods and eating out. In San Diego, consumers favor fitness and health stores, sporting goods, pet supplies, drug stores and fast food restaurants among other retail categories (Figures 6 and 13). Changing consumer behavior has forced retailers to grapple with more competitive and selective customer spending habits. All consumers want more for their money in addition to convenience and excellent service. An increased competition from online retailers should be added to the list of challenges of brick-and-mortar stores driven by consumers who crave the knowledge of price comparisons and the convenience of in-home shopping. Online shopping has had an especially profound impact on industries like book stores and movie rentals, forcing several retailers including Borders and Blockbuster to downsize and close stores in San Diego (Figure 13). To embrace rather than fight the growing online retail trade, more and more big name retailers, including Walmart, Best Buy, Home Depot, Sears and Walgreens, are adopting programs for online ordering and in-store pickup and returns. 34
San Diego Retail Forecast 35 There is no doubt that the smaller mom-and-pop stores are the most vulnerable to e-commerce in this environment which has forced many smaller retailers to close their doors over the last three years in San Diego. Consequently, activity has increased among the franchisers who have a huge advantage over the mom-andpop stores, thanks in large part to a greater access to financing compared to individual smaller businesses. Many people from corporate America who have been laid off as well as entrepreneurs whose small stores did not survive the recession have chosen to convert to a franchise and take advantage of instant brand recognition and buying power, a trend that is expected to continue. Service-based franchises have proven to be the most successful as inventory is not required and, therefore, cannot be manipulated by the internet or outsourced for manufacturing. Massage Envy, a spa franchise, is one example in San Diego that has been very successful capturing market share over the last two years. 8,000 4,000 0 (4,000) (8,000) (12,000) Billions Fig. 3 Retail Jobs in San Diego, CA MSA Net Change in Jobs Between 1999 and 2006 San Diego County added a total of 23,267 retail jobs % Change Between 2007 and 2010 San Diego County lost a total of 17,620 retail jobs + 6,820 + 4,842 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f San Diego-Carlsbad-San Marcos, CA Metropolitan Statistical Area (MSA). Retail Jobs include Retail Trade. Source: Moody s Analytics. (f) forecasted. Forecast last updated 9/20/2012. Fig. 4 Taxable Retail Sales vs. Unemployment Rate San Diego-Carlsbad-San Marcos, CA Metropolitan Statistical Area (MSA) $16 $14 $12 $10 $8 $6 $4 $2 Taxable Sales Unemployment Rate $0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 Source: Beacon Economics. Forecast last updated 10/1/2012. 6% 4% 2% 0% -2% -4% -6% -8% 12% 11% 10% 9% 8% 7% 6%
Franchise Retail: Among other franchise serviceproviding retailers expanding in San Diego are haircut stores and full-service salon-type professionals. SportClips, providing haircuts for men in a sportsthemed environment, has signed 13 new leases in 2012 with high projections for 2013. Phenix Salon Suites, based out of Colorado Springs, provides upscale private suites functioning as fully-equipped minisalons and is currently franchised in 13 states. Phenix Salon Suites currently has five open Southern California locations and plans on a strong expansion plan for 2013 with approximately 20-25 executed leases in 2013. On a national level, the company will have 35 locations open by the end of 2012 with over 100 under development. Supercuts has continued its San Diego expansion by opening three new stores in 2012 and has plans to open four more locations next year. Fig. 5 What are consumers buying nationwide? U.S. Sales for Retail & Food Services, by Kind of Business in $Millions Y/Y Change Furniture & home furn. stores +5.3% $7,938 Sporting goods, hobby, book & music stores Electronics & appliance stores +4.2% -5.6% $7,500 $8,150 Total U.S. Retail Sales $411.6 billion, up 3.8% Y/Y Miscellaneous store retailers +6.1% $10,244 Clothing & clothing accessories stores Health & personal care stores Building material & garden eq. & supplies dealers +5.5% -0.5% +0.7% $20,077 $22,851 $24,318 Nonstore retailers +7.2% $37,060 Food services & drinking places Gasoline stations Food & beverage stores General merchandise stores +4.2% +7.7% +3.9% +0.0% $44,028 $47,849 $53,776 $53,023 Motor vehicle & parts dealers +5.0% $74,777 In $ In $Millions $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 The advance estimates of U.S. retail and food services sales for October, 2012 adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $411.6 billion, 3.8% increase from a year ago (October, 2011). Total sales estimates are shown in millions of dollars and are based on data from the Advance Monthly Retail Trade Survey, Monthly Retail Trade Survey, and administrative records. Source: U.S. Census Bureau Service Sector Statistics Division. November 14, 2012. 36
San Diego Retail Forecast 37 Other expanding service-type franchises include European Wax Center and The Joint, the chiropractic place. Retail space is also being taken by service types that would traditionally find home in medical offices. Pacific Dental Services opened three new locations in San Diego in 2012 and three more locations are planned for next year. Medifast is also planning to expand in San Diego in 2013. In 2012, there was a surge of fitness studios including many franchised concepts such as The Bar Method, The Dailey Method, barre3 and Pure Barre expanding throughout Southern California. Fitness users, especially those with a discount model such as Chuze Fitness and Crunch Fitness, have been rapidly expanding in Southern California. Restaurants: The restaurant segment, immune to the cannibalization of online shopping, served as another bright spot in 2012. Many of the fast, casual concepts that have been in expansion mode for the last Fig. 6 Retail Tenant Categories in 2012 San Diego County New to Market/Expanding Wireless Discount Stores incl. Discount Grocery Stores Banks Fitness/Health/Personal Care Sporting Goods Pet Supplies Electronics/Games Fast Food Fast Casual Restaurants Paycheck Advance Drug Stores few years continued the trend throughout 2012 and will continue in 2013. Luna Grill, which prides itself on healthy and fast Mediterranean cuisine, opened three new San Diego locations in 2012 and has plans to open three more locations in 2013. The popular San Francisco concept, Boudin SF, plans to open six locations in Southern California in 2013. Though San Diego seems to be reaching its saturation point with fast-casual burger concepts, 2012 welcomed new locations from Smashburger, The Counter, Five Guys and Burger Lounge. Pick Up Downsizing Book Stores Movie Rentals Source: Cassidy Turley San Diego. Mid-Priced Grocery Stores Stationary & Gifts Stores Clothing Stores Furniture Home Goods Tanning Salons Shipping/Packing/Postal Mail Centers Finance/Consumer Loan Auto Dealerships Office Supplies Stix also opened two new locations in San Diego this year and has another two planned for next year. Boneheads: Grilled Fish & Piri Piri Chicken has plans to expand to San Diego with two new locations in 2013. Grocery Stores: Besides serviceoriented retailers, grocery stores have benefited from the economic downturn as people dine out less frequently. Landlords have recognized the trend as groceryanchored centers have been successful in attracting traffic to their centers. People still have to
Fig. 7 Top Retail Submarkets By Leasing Activity San Diego County - All Center Types Ranked by SF Leased - 2012YTD Highest Leasing Activity in 2012 Rank Submarket 1 Encinitas 2 Kearny Mesa 3 El Cajon 4 Downtown 5 San Ysidro 6 Escondido 7 Oceanside 8 San Marcos 9 Miramar 10 Chula Vista Source: Cassidy Turley San Diego. 2012YTD as of 12/12/12. Highest Leasing Activity in 2011 Rank Submarket 1 Chula Vista 2 Escondido 3 National City 4 Carlsbad 5 Poway 6 Downtown 7 Oceanside 8 El Cajon 9 San Marcos 10 Kearny Mesa benefits of increased sales in the future. Entertainment and events directly linked to driving sales are becoming increasingly common in stores and malls countywide. Stores will gear more towards service and the education of consumers about products. Expect to see more tastings, demos, free gifts and promotions to augment store traffic in 2013.To ensure success, retailers will need to continue to innovate in service and offerings to separate themselves from their competition and to capture sales. Discount Stores: The recession buy food and other commodities Landlords are increasingly focusing pushed cash-strapped shoppers to regularly and consumers still want on bringing daily needs and pick necessities over discretionary to go to the mall to see and be services into the centers, linking items, allowing value-based retailers seen. Some grocery stores, such leisure activities with shopping to gain market share and continue as Vons, Ralphs, and Fresh & Easy and selecting the right mix of with their expansion plans in San are attracting customers through tenants. New and interesting Diego. The slow and shaky recovery community programs in San Diego tenants help a property stand out. is still steering users to remain such as giving a percentage of For example, some landlords are conscious of the best use for sales to local schools. Others, such adding child educational services each of their consumable dollars. as gas stations, banks and coffee that allow parents to drop off Several value-based retailers have shops, attract loyal customers their kids and run errands in the found opportunities in the excess through rewards programs. Many immediate area. 7 Landlords who space left by closed mid-to-big- larger landlords are advertising their cater to local demographics and box retailers such as Mervyn s, tenant promotions through social provide an unforgettable shopping Circuit City, and Linens & Things. media in order to attract traffic. experience including outstanding customer service will reap the Landlords, on the other hand, are embracing the few segments that 38
San Diego Retail Forecast 39 are experiencing growth to grapple with vacant space. Discount stores such as Dollar Tree, Family Dollar, and 99 Only continue to expand rapidly as consumers are favoring the discount model for many of their daily needs. 99 Only is even considering opening a store in the prestigious Beverly Hills area. 8 The company opened one new store in San Diego in 2012 and is looking to add four more locations in the area in 2013. Leasing: Evaluating retail leasing activity countywide for centers of all sizes in 2012, 9 activity was 4% lower compared to last year; however the average tenant footprint countywide increased 76% from 3,253 SF in 2011 to 5,718 SF in 2012. Power centers recorded the highest increase in tenant footprints followed by showrooms, free-standing buildings and community centers. Tenant footprints decreased, however, in regional, urban retail and strip centers compared to 2011. The top five most sought-after submarkets in 2012 based on leases signed were Encinitas, Millions Property SF Tenant Transaction Type Submarket The Plaza Encinitas Ranch 105,896 Walmart Lease Encinitas El Camino North 75,360 LA Fitness Lease Oceanside 2121 E. Imperial Avenue 45,800 Walmart Lease Downtown The Plaza at The Border 27,500 Ross Lease San Ysidro The Plaza at The Border 24,500 TJ Maxx Lease San Ysidro 0.8 0.4 0.0-0.4-0.8-1.2-1.6 Fig. 8 Key Retail Lease Transactions 2012YTD Kearny Mesa, El Cajon, Downtown and San Ysidro (Figures 7 and 8). These five submarkets combined accounted for 53% of the total Source: Cassidy Turley San Diego. 2012YTD as of 11/30/12. Fig. 9 Net Absorption vs. Completions San Diego County Retail, All Center Types excl. Sublease San Diego County Retail, All Center Types excl. Sublease Net Absorption Annual Completions 2007 2008 2009 2010 2011 2012e 2013f Cassidy Turley San Diego tracks retail centers over 50,000 SF, excluding owner-user. Downtown and Uptown existing inventory totals include all retail centers 10,000 SF and up. Retail buildings include community centers, freestanding retail, neighborhood centers, power centers, regional mall and strip centers. Source: Cassidy Turley San Diego. (e) estimated, (f) forecasted. square feet leased this year. The top 10 submarkets combined accounted for 79% of the total leasing activity, indicating that of
29 retail submarkets countywide, tenant demand is concentrated in the top 10. 8% Fig. 10 Direct Vacancy Rate San Diego County Retail, incl. Sublease In 2011, leasing activity was spread across a wider range of submarkets as the top five submarkets combined accounted for 41% of the total space leased. Consequently, the top 10 6% 4% 7-Year Direct Vacancy Avg. 4.3% 5.9% 3.2% 3.1% 5.5% 5.5% 5.0% 4.8% submarkets combined accounted for 64% of the total leasing activity. 2% 1.8% Net Absorption: Countywide net absorption for centers larger than 50,000 SF 10 was 281,535 SF in the first half of 2012, which is double the amount absorbed during the second half of 2011. All center types recorded positive net absorption in the first half of 2012, with the exception of regional centers. In 2013, overall leasing activity level for centers of all sizes is expected to remain the same or improve slightly yet remain below the prerecession levels. Net absorption for centers 50,000 SF and larger is expected to be slightly weaker than in 2012 yet remain positive (Figure 9). The scarcity of prime retail space that 0% 2006 2007 2008 2009 2010 2011 2012e 2013f Cassidy Turley San Diego tracks all retail centers over 50,000 SF, excluding owner-user. Downtown and Uptown existing inventory totals include all retail centers 10,000 SF and up. Retail buildings include community centers, freestanding retail, neighborhood centers, power centers, regional mall and strip centers. meets all requirements of national tenants scouting the market will be one of the reasons of tempered activity. Vacancy: Countywide direct vacancy is expected to decrease from 5.0% in 2012 to 4.8% in 2013 as the retail market continues to work its way through the recovery (Figure 10). With no new deliveries scheduled for 2013, leasing should remain competitive. This is especially true in well-positioned Source: Cassidy Turley San Diego. (e) estimated, (f) forecasted. properties where demand is beginning to outpace supply and reduced rents will begin to creep back towards their pre-recessionary peak levels. Among submarkets commanding the highest effective rents include Del Mar, La Jolla, Solana Beach and UTC with effective rents ranging between $3.46 to $5.70 per month. The countywide effective rent average in 2012 was $2.37 compared to $2.39 in 2011. 40
San Diego Retail Forecast 41 Asking Rents: The overall countywide monthly average asking rent for all center types was $1.99 per month per square foot triple net (NNN) in the first half of 2012, a 2.5% decrease from mid-year 2011. Free-standing, strip and power centers recorded the most improvements in asking rents from a year ago, a trend that is expected to continue. The countywide average asking rent for all center types is expected to increase between one and two percent in 2013. In most submarkets, tenants will continue to have the upper hand in negotiations. Redevelopment Activity: Westfield Group is not only the largest landlord in San Diego but also a leader of redevelopment activity. The company owns seven shopping centers and employs approximately 13,000 people countywide (Figure 11). The highlights of three major revitalization projects in 2012 are: 1. Westfield University Towne Center (UTC): The impressive $180-million renovation and expansion included transformation of the entire Fig. 11 Largest Retail Landlords & Tenants in 2012 San Diego County All Product Types Ranked by SF Top 10 Landlords Rank Landlord 1 Westfield Group 2 Sears Holdings Corporation 3 Fashion Valley Mall, LLC 4 Grossmont Shopping Center Co. 5 Ecke Paul Ranch 6 Utc Venture LLC 7 Costco Wholesale Corporation 8 Regency Centers LP 9 Chula Vista Center LLC 10 Nevada Investment Holdings Top 10 Tenants Rank Tenant 1 Nordstrom Source: CoStar. 2012 as of 11/30/12. 2 AMC Plaza Bonita 14 3 Lowe s 4 Walmart 5 Sears Essentials 6 Costco 7 The Home Depot 8 Neiman Marcus 9 Regal Cinemas 10 Kmart Fig. 12 Key Retail Sale Transactions 2012YTD Property SF Seller/Buyer Price Submarket Balboa Mesa Shopping Center 189,321 Lubert-Adler Partners, L.P. / Regency Centers Corporation $59,500,000 Clairemont Bonita Centre 99,701 Clairemont Village 127,148 La Costa Towne Center 121,429 Old Grove Marketplace 81,279 Nottingham Associates Inc. / Donahue Schriber Commercial Real Estate Essel Enterprises / Kleege Enterprises Excel Trust, Inc. / Excel Trust, Inc. & GEM Realty Capital, Inc. Sea Breeze Old Grove, LLC / Gerrity Group Source: Cassidy Turley San Diego. 2012YTD as of 11/30/12. $30,550,000 Chula Vista $27,300,000 Clairemont $23,500,000 Carlsbad $19,550,000 Oceanside
center site into a retail-resort inspired experience, including alfresco dining, new A-list retailers and entertainment - all inviting shoppers to Escape... Everyday. A number of new retailers including Splendid, Eureka!, Tesla Motors, Seasons 52 and ArcLight have chosen Westfield UTC as their first location in the San Diego market, joining other popular new arrivals such as Tiffany & Co., J. Crew, Tender Greens and Elixir. This project, which exemplifies Westfield s ongoing commitment to San Diego, generated approximately 2,400 new jobs in San Diego, including nearly 1,000 construction jobs. The center meets LEED Gold certification standards. The UTC community, city officials and special guests celebrated the Grand Opening on November 15, 2012. 11 2. Westfield North County: The ambitious and longoverdue $55-million redevelopment and revitalization of the 83-acre, 26-year-old mall located in Escondido started on April 3, 2012. 12 This project was among the five largest retail construction projects to break ground in the nation during the first half of 2012. 13 This project will not only transform the shopping center to attract new retailers and offer patrons an enhanced shopping experience with a greater diversity of stores, dining opportunities and services but accounts for an estimated 318 new construction jobs and 551 permanent service and retail positions. Upon completion in December 2012, the improvements will bring an estimated additional $1 million in sales tax reaching $5 million in lease revenues to the City of Escondido annually. Additional revenues will be generated by attracting new retail opportunities and services not previously found in the market and through increased sales at the center. 14 The highlights of the revitalization include 15 : A new 150,000-square-foot, multi-level Target established in the space formerly occupied by Robinsons-May will bring new life to a former department store building that has been vacant since 2006. Revitalization of the interior of the shopping center, which includes new floor finishes, interior paint and lighting schemes, furniture, handrails, signage, and a children s play area. New full-service restaurants. Renovating the dining court and restrooms. Remodeling and updating all eight entrances to the center. Resurfacing the entire parking lot. 3. The Westfield Horton Plaza: Originally built in 1870, this Plaza is on its way to becoming San Diego s version of Times Square. 16 Westfield sold the department store site back to the city in exchange for dropping a profit-sharing agreement that yields about $2 million annually to the city. The $14.7 million expansion started in November 2012 and is planned to be completed by March 2014. Construction plans include demolishing the old Robinson s-may and Planet Hollywood building to make room for a new 1.3-acre public park that includes the existing park and will extend south to Balboa Theater, Fourth 42
San Diego Retail Forecast Avenue and E Street. 17 The space will be utilized by the city to create an outdoor venue capable of hosting over 200 events a year to cater to 37,000 residents 18 of Downtown San Diego as well as visitors. Sales Activity: The total sales volume of retail centers of all sizes countywide was $399.6 million in 2012, a 30.4% decrease compared to 2011. Top buyers in San Diego County in 2012 based on total sales volume were Jason Zana, Kimco Realty Corporation, Donahue Schriber Commercial Real Estate, Excel Trust, Inc., Laurent Hamon, Retail Opportunity Investments Corp., J4 Asset Management, Inc., Gerrity Group LLC, Rosecrans Plaza Kiffmann, LLC, and Saber SMCCP LLC (Figure 12). Top sellers were LNR Partners, Inc., C.W. Clark, Inc., and BlackRock, Inc. The average price per-square-foot was $254 in 2012 compared to $216 in 2011. The average cap rate was 6.90% in 2012 compared to 7.09% in 2011. 19 In 2013, the demand for Class A assets with well-positioned quality tenants in high-traffic submarkets will continue to outpace supply. The lack of available product will keep the lid on transaction volume instead of a lack of available capital. fundamentals are showing signs of recovery. 1. The Secrets of Economic Indicators by Bernard Baumohl. Wharton School Publishing. 2005. 2. The Conference Board Leading Economic Index (LEI), November 21, 2012. http://www. conference-board.org/data/bcicountry.cfm?cid=1 3. The Conference Board, November 27, 2012. http://www.conference-board.org/data/consumerconfidence.cfm 4. U.S. Department of Labor, Bureau of Labor Statistics Labor Dept. November 16, 2012. 5. www.bls.gov San Diego: October 2011 vs. October 2012. National: November 2011 vs. November 2012 6. Moody s Analytics; economy.com; forecast last updated 9/20/2012. 7. Shopping Centers Today, December 2012. 8. http://articles.latimes.com/2012/oct/12/business/la-fi-99cents-rodeo-drive-20121012 9. Based on lease comparables total SF leased as of 12-12-2012 10. Cassidy Turley San Diego tracks retail centers over 50,000 SF, excluding owner-user. Downtown and Uptown existing inventory totals include all retail centers 10,000 SF and up. Retail buildings include community centers, freestanding retail, neighborhood centers, power centers, regional mall and strip centers. 11. http://www.westfield.com/corporate/news-announcements/media-releases/2012/20121116_14704.html 12. http://www.nctimes.com/news/local/escondido/escondido-westfield-breaks-ground-on-mmall-upgrade/article_73f782b1-7df8-54d7-a8a9-016d03325572.html 13. http://www.nctimes.com/news/local/escondido/escondido-mall-renovations-among-top-fiveretail-projects-in-nation/article_a674fcc9-bca5-5316-9666-8dd211fed917.html 14. http://www.westfield.com/northcounty/news-and-events/revitalize/ 15. http://www.nctimes.com/news/local/escondido/escondido-westfield-breaks-ground-on-mmall-upgrade/article_73f782b1-7df8-54d7-a8a9-016d03325572.html 16. San Diego Daily Transcript, November 29, 2012. http://www.sddt.com/reports/article.cfm?rid =961&SourceCode=20121129czf&_t=Horton+Plaza+project+groundbreaking+held 17. Union Tribune, November 27, 2012 Horton Plaza expansion to begin with boom by Roger Showley 18. SANDAG. 19. CoStar Group, Inc. and Real Capital Analytics, Inc. 43 Overall, 2013 is slated to lay the groundwork for the San Diego retail market to transition from the slow recovery seen since the last recession, including the financial crisis, to a more vibrant recovery in the coming years. San Diego remains an attractive destination for retail companies with its high median income and positive population growth. Retailers will continue to compete for the most visible locations, especially with a dearth of new construction projects on the horizon. Landlords with less desirable locations will attempt to attract and retain quality tenants by investing in the revitalization of their properties or offering concessions. The vibrancy of San Diego s retail sector was greatly hurt by the recession, but
Fig. 13 2012 Retail Store Closings & Openings 2012 Retail Store Closings: U.S. Retailers Downsizing or Going Out of Business Nationwide # of Stores Closed highlighted in PURPLE - stores closing in San Diego Nationwide 600 Fashion Bug 500 Blockbuster 180 Abercrombie & Fitch 172 Sears 137 Ritz Camera & Image/Wolf Camera 123 Collective Brands (Payless, Stride Rite) 120 Pacific Sunwear 113 Food Lion 103 Christopher & Banks 100 Family Dollar 100 The Gap 96 Avenue 93 Esprit 76 USA Drug/Super D/ Drug Warehouse/May's/Med-X 70 Casual MaleXL 63 Betsey Johnson 60 SuperValu (Albertson's/ACME/Save-A-Lot) 55 Ascena Retail (Dressbarn, Marices, Justice) 50 Best Buy 50 T.J. Maxx 40 Catherine's 35 Office Max 30 Coldwater Creek 25 Beauty 360 25 Lane Bryant 25 Sonic 22 77kids 19 Daffy's 14 United Carpets 13 Cato 12 Fred's 11 Sara Lee Outlets 8 Bill's BBQ 6 Bottom Dollar 6 Waldbaums 5 Carl's Patio 5 Hallmark 5 Pathmark 5 Shoe Carnival 4 Macaroni Grill 4 Mandee 3 A&P 3 Bloom 3 Genuardi 3 Loupot's 3 Wise Buys 2 All Sports 2 C&C Kids 2 CVS 2 Disney Store 2 O' Boys Bar-B-Q 2012 Retail Store Openings: U.S. Retailers Expanding Nationwide # of Stores Opened highlighted in PURPLE - stores opening in San Diego Nationwide 630 7-Eleven 500 Family Dollar 280 Dunkin Donuts 198 Walgreens 175 McDonald's 170 O'Reilly Auto Parts 145 Ascena Retail (Dressbarn, Marices, Justice) 140 Advance Auto Parts 135 Wal-Mart Supercenter 125 Charming Shoppes 100 Walmart 85 Fossil 80 Big Lots 75 Foundry Big & Tall Supply Company ( JC Penney) 75 Francesca's Collections 75 Pep Boys 75 Rue 21 60 Ulta 53 Fastenal 50 AutoZone 50 Citi Trends 50 Five Below 50 Versone Accessories (Cato) 47 IQuikTrip 45 Dots 40 Body Central 38 Steele's 40 Casual Male 30 Shoe Carnival 28 99 Cents Only 25 Crocs 25 Express 25 Krispy Kreme 25 Target 25 Texas Roadhouse 24 Microsoft 22 Wetseal 21 Chico's 20 Tilly's 18 Fresh & Easy 15 Anthropologie 15 Athleta 15 Cato 15 Charming Charlie's 15 H&M 15 JB Hi-Fi 15 Nordstrom Rack 11 Bebe 11 Free People 10 Costco 10 David's Bridal About.com Retail Industry. List last updated 9/18/12. About.com Retail Industry. List last updated 7/18/12. 44
San Diego Investment Forecast 45
San Diego Investment Forecast Pursuit of Trophy Assets Continues Throughout 2012 the San Diego commercial real estate investment market transaction volume fell back to 2010 level, reporting a 19% year-over-year decrease compared to 2011. 1 The sluggish economic recovery, Presidential elections, Europe s financial difficulties, uncertainty about the fiscal cliff and sequestration, combined with the diminishing supply of available trophy assets were among the key factors that kept the national and local commercial real estate investment market at a slow pace in 2012. The political uncertainty that was expected to cease after the November 2012 elections has continued due to fiscal cliff issues and will carry over into 2013, tempering investment activity. With changed tax codes such as the increase in capital gains tax and a 3.8% surtax on investment income to fund the new healthcare law, investors will presumably be reluctant to partake in any substantial transaction early in 2013. Fig. 1 Interest Rates (U.S. Economic Forecast) 3 Month LIBOR Prime Rate 5 Year Note 10 Year Note 30 Year Bond 5% 4% 3.25% 3% 2.82% 2% 1.65% 1% 0.62% 0% 0.36% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: Wells Fargo U.S. Economic Forecast. Release Date: December 13, 2012 Fortunately, the longer the economic potential for increased cash flow. and political environments remain These markets are perceived to be uncertain, the more attractive the most resilient and successful and logical commercial real investment options and will continue estate will look as an investment. to be investors favorite markets for Demand for income-producing the foreseeable future (Figure 2). properties is expected to continue However, investment activity in major to grow, supported by improving markets has been losing momentum fundamentals across all property due to the limited number of Class types and the Fed s accommodative A trophy properties available for monetary policy. acquisition. Furthermore, investors have pushed the prices for the best The most sought after properties properties to premium levels activity are stabilized, Class A trophy assets fueled by increased debt availability located in the major metro markets to those who qualify resulting in a with long-term leases in place and very competitive market dominated 47
Fig. 2 Rankings by Total Year-to-Date Sales Major Primary Secondary Rankings 1 1 1 1 2 3 2 2 4 4 4 3 3 2 3 4 5 8 5 5 6 6 6 6 7 7 7 7 14 10 12 8 9 9 8 9 12 5 10 10 10 13 11 11 8 12 9 12 13 16 14 13 23 14 20 14 11 11 15 15 20 18 21 16 28 26 19 17 19 25 13 18 18 22 18 19 24 23 26 20 17 15 24 21 16 17 17 22 21 20 22 23 25 24 29 24 30 30 28 25 22 29 16 26 15 21 25 27 29 27 30 28 26 19 23 29 27 28 27 30 Office, Industrial, Retail, Mulifamily 09YTD 10YTD 11YTD12YTD Market 2012YTD Sales Volume *2012 YTD % Change NYC Metro LA Metro SF Metro DC Metro Chicago Dallas Houston Seattle Boston So Fla Phoenix Atlanta Denver Austin San Diego Baltimore Charlotte Philly Metro Minneapolis Nashville Orlando Tampa Portland Detroit Memphis Las Vegas Sacramento Cleveland St Louis Cincinnati $1.67B $1.51B $1.31B $1.28B $1.21B $1.04B $795M $730M $682M $670M $609M $502M $497M $2.98B $2.09B $1.79B $4.42B $4.26B $4.17B $3.59B $3.13B $6.00B $5.71B $5.30B $5.29B $4.97B $10.18B $12.34B $15.44B $21.56B -32% -14% -58% -15% -48% -9% -9% -23% 5% 21% 14% 11% 26% 5% 34% 32% 11% 7% 34% 46% 35% 54% 22% 69% 67% 61% 94% 86% 73% 168% YTD represents 1Q-3Q of given year. *2012 YTD % Change represents change between 2012YTD and 2011YTD. Source: Real Capital Analytics. Based on properties & portfolios $5 million or greater. 48
San Diego Investment Forecast by large institutional investors and ultra-wealthy private investors with pristine credit and deep pockets. That has resulted not only in a highly competitive environment but also in a decrease in capitalization (cap) rates and therefore lower yields (Figures 5 and 6). In 2013, activity in the San Diego investment market is expected to improve moderately. Total sales San Diego volumes in San Diego for all property types combined has increased since 2009 with the exception of Fig. 3 Who is Buying in San Diego? San Diego Market: All Commercial (Office-Industrial-Retail) United States The good news is that bidding wars in major markets are driving investors and therefore transaction volume beyond traditional hot spots to primary and secondary markets such as San Diego. The more investors shift focus outside the major markets in search of a steady cash flow, the more competitive the search for a great deal or a diamond in the rough property will become. The challenge investors will continue to face, however, will be finding and closing lucrative deals as competition heats up for a shrinking pool of properties. 23% 25% 14% 7% 32% 35% 38% 11% 29% 35% 4% 25% 13% 29% 20% 15% 11% 4% 2009 2010 2011 2012 (YTD) 28% 29% Institutional Cross-Border Public Listed/REITs Private User/Other Source: Real Capital Analytics 2012YTD as of 11/9/12. Based on properties & portfolios $5 million and greater. Fig. 4 Key Sale Transactions 2012YTD Property SF Seller/Buyer Price Submarket Property Type San Diego Tech Center 641,693 Charter Hall Office REIT / Beacon Capital Partners $152,500,000 Sorrento Mesa Industrial DiamondView Tower 305,255 Wereldhave USA-CA LLC/ Cruzan Monroe/ & CIGNA $120,880,980 Downtown Office Legacy Apartment Homes 351,336 Garden Communities LLC/ R&V Management Corporation $91,000,000 Mira Mesa Multi-Family Balboa Mesa Shopping Center 189,321 Lubert-Adler Partners, L.P. / Regency Centers Corporation $59,500,000 Clairemont Retail 10% 20% 33% 8% 2012 (YTD) 49 One Pacific Heights 120,350 RREEF America LLC/ BCL/ AEW Capital Management, L.P. $34,100,000 Sorrento Mesa Office
2012, largely due to a lack of product that matches investor requirements (Figure 7). Office sales led the way in 2012 followed by multi-family, industrial and retail properties (Figure 8). The most active buyers of San Diego properties in 2012 were institutional, private, and crossborder investors, a trend that is expected to continue in 2013 (Figure 3). In 2013, total sales volume is forecasted to increase between 20% and 30%, encompassing all product types fueled by improving market fundamentals such as decreasing vacancies, low cost of capital, and investor willingness to take a little more risk in search for higher yields outside the highly competitive Class A trophy assets markets. However, the lack of existing product and new construction may impede the ultimate San Diego transaction potential. San Diego Sales by Product Type Office: The office market in San Diego was stalled from its growth Fig. 5 Average Property Index Returns By Property Type 12% 8% 4% 0% -4% -8% Office Industrial Retail Multifamily -12% 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12 Source: National Council of Real Estate Investment Fiduciaries (NCREIF). http://www.ncreif.org/property-index-returns.aspx?region=w 10% 9% 8% 7% 6% 5% 4% 3% Fig. 6 Average Cap Rates in San Diego Market Office Industrial Retail Multi-Family 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YTD Source: Real Capital Analytics 2012YTD as of 12/10/12. Based on properties & portfolios $5 million and greater. 8.1% 7.8% 6.5% 5.8% 50
San Diego Investment Forecast Fig. 7 Total Sales Transaction Volume in San Diego Annual Sales Transaction Volume Fig. 8 Sales by Property Type in San Diego 2012YTD $12 Office Industrial *Retail *Multi-Family Forecast Billions $10 $8 $6 $4.6 billion average annual sales volume from 2002 to 2011 (10 years) $1.4 $0.9 $1.2 $1.5 $2.6 $2.1 $0.5 *Retail 18% Office 31% Time period Total Sales Volume in $ Billions % Change 2010YTD (1Q10-3Q10) $1.6 121.8% 2011YTD (1Q11-3Q11) $1.7 9.1% 2012YTD (1Q12-3Q12) $1.9 6.2% *Excludes entity level, partial interest transfers & pending $4 $1.0 $1.1 $1.5 Industrial 25% $2 $0 $1.1 $1.1 $1.4 $5.6 $1.0 $0.7 $1.4 $0.7 $0.6 $0.5 $0.8 $0.7 $0.5 $3.6 $0.6 $0.4 $0.3 $0.2 $0.4 $0.6 $0.5 $0.3 $0.4 $0.5 $2.2 $2.2 $0.3 $0.5 $1.1 $1.3 $0.1 $1.1 $0.2 $1.3 $1.4 $0.8 $1.0 $0.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f *Multi-Family 26% Fig. 9 Office Sales Transaction Volume in San Diego Fig. 10 Industrial Sales Transaction Volume in San Diego $6,000 $5,000 $2.0 Billion avg. annual office sales volume from 2002 to 2011 or 10 years Millions $2,000 $1,600 $817.1 million avg. annual industrial sales volume from 2002 to 2011 or 10 years $4,000 Millions $3,000 $1,200 $2,000 $800 $1,000 $400 $0 $1,091.6 $1,283.3 $2,194.0 $2,158.3 $3,644.1 $5,562.9 $1,086.0 $459.9 $817.6 $1,282.3 $1,148.3 $1,414.7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f $0 $319.3 $633.6 $1,141.5 $1,376.8 $1,509.2 $1,531.0 $408.4 $215.9 $538.1 $497.7 $564.4 $581.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f Fig. 11 Retail Sales Transaction Volume in San Diego Millions $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $569 million avg. annual retail sales volume from 2002 to 2011 or 10 years Fig. 12 Multi-Family Sales Transaction Volume in San Diego Millions $3,000 $2,500 $2,000 $1,500 $1,000 $500 $1.3 Billion avg. annual multi-family sales volume from 2002 to 2011 or 10 years 51 $0 $322.6 $725.7 $963.0 $1,083.1 $506.4 $864.5 $186.0 $109.3 $424.2 $632.6 $450.0 $495.6 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f $0 1,391.8 1,099.4 2,587.9 2,121.5 1,176.7 1,375.7 787.9 349.4 676.3 1,014.6 $608.40 $638.8 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f Source: Real Capital Analytics 2002 2012YTD as of 12/6/12. Based on properties & portfolios $5 million and greater. (e) estimated, (f) forecasted by Cassidy Turley San Diego.
trend in 2012 with an estimated decrease in transaction volume of 10.5% from 2011. Looking into 2013, demand for Class A assets with well-positioned quality tenants in place will continue to outpace supply. The lack of available product will hinder sales volume momentum. However, as investors set their eyes on riskier tangible assets with higher yield potential, office sales are anticipated to pick up and increase by 23.2% next year (Figure 9). Industrial: With leasing activity improving and a lack of new supply, industrial properties have become increasingly more attractive to investors. As a result, San Diego witnessed a slight uptick in sales activity in this sector. In 2012, total industrial sales volume countywide is estimated to reach $564.4 million, a 13.4% increase compared to 2011. Sales volume of industrial properties has been steady for the last three years, averaging $533.4 million per year. Given the aforementioned trend, industrial sales are projected to continue to edge up slightly by the end of 2013 (Figure 10). Billions bounce back in 2013 with growth forecasted at 10.1% (Figure 11). Triple net investments and shopping centers with groceryanchored tenants will feed the majority of investor appetite. Multi-Family: For the first time since emerging from the recession, multi-family sales in San Diego witnessed a decline in transaction volume from the previous year due to the shortage of supply and landlords being less motivated to sell as market fundamentals continued to strengthen. The total sales volume for multi-family properties of all sizes countywide was $608.4 million in 2012, a 40.0% decrease compared to 2011 (Figure 12). However, with many large transactions currently in the pipeline such as the pending Archstone portfolio reorganization, sales are expected to regain momentum and increase by approximately 5.0% in 2013. Debt Market: Overall, debt markets keep improving with historically low interest rates and greater liquidity of capital. CMBS lenders are steadily climbing back with their expected issuance of debt to rise by $10 billion in 2013. Life company lending persists but only accounts for 12% of total issuance and cannot completely fill the void that the CMBS market once dominated during its peak in 2007. Commercial banks represent 34% of issuance but even with demand for commercial real estate Total Fig. Outstanding 13 Total Outstanding Distress Distress in the U.S. in the U.S. $400 $300 $200 $100 Troubled REO Restructured Resolved Retail: Due to the lack of quality product, annual sales fell 28.9% from $632.6 million in 2011 to an estimated $450.0 million in 2012. Retail sales are poised to $0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Source: Real Capital Analytics 11/12/2012. Based on properties & portfolios $5 million and greater. Sep-11 Jan-12 May-12 Sep-12 52
San Diego Investment Forecast 53 loans, they are not increasing overall loan volume. 2 Underwriting is very disciplined and focused, scrutinizing asset quality, location, and historical asset and market strength more than ever before. There has been a persistent demand for loans to buy commercial real estate and there is a tremendous appetite for high-quality assets. Competition is fierce for top-quality product with commercial banks competing amongst each other as well as life insurance companies and the growing CMBS market; this, in turn, is driving interest rates down. However, investors who want to buy a riskier property (A- or below) are still having trouble obtaining financing with reasonable terms. Distressed Market: Distressed product, while still a major component of the investment market, has declined by 6% in 2012. Workouts have exceeded inflows with the majority of inflows resulting from maturity defaults of remaining underperforming CMBS loans. In total, from the recession until present, $374.4 billion of significant property has become distressed and 55% of the total has been resolved. 3 Fig. 14 Current Known Distress through 10/24/2012 Select West Region Markets Los Angeles Las Vegas Inland Empire Orange Co Seattle East Bay Sacramento San Diego San Francisco San Jose Portland $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 However, even considering the shrinking number of distressed assets paired with a growing percentage of workouts, there is still the $1.5 trillion worth of commercial loans that will mature between now and 2017. This represents greater uncertainty and may keep the market from a full recovery. With CMBS as the largest chunk of this remaining total, and its default rate currently at 10%, full recovery is highly unlikely in the immediate future unless values can grow and keep increasing at a very high rate (Figure 13). San Diego has relatively few Office Industrial Retail Apartment Office Industrial Retail Multi-Family Total Distress in San Diego in $ Millions $680.0 $168.6 $255.6 $61.4 San Diego Distress as a % of Total West Region Distress 6.2% 3.9% 3.7% 1.1% Total West Region Distress in $ Millions $10,887.4 $4,356.2 $6,941.1 $5,554.0 Source: Real Capital Analytics 11/12/2012. Based on properties & portfolios $5 million and greater. Millions distressed assets; however there still remains a good number of overleveraged owners hoping for values to continue to increase. With $27.8 billion of current distressed office, industrial, retail, and multifamily assets combined in the Western region, San Diego ranks as one of the lowest distressed markets with $1.2 billion or roughly 4.2% of the total distress in the Western region (Figure 14). In 2013, the San Diego investment market is expected to continue to parallel the US economy by showing growth, but at a moderate pace.
The lasting sluggish real estate recovery should continue at the same pace in 2013 due to lingering uncertainty about market specific and macroeconomic factors. The U.S. deficit, the pending Euro crisis, a crippled credit market, and ramifications of the fiscal cliff - especially tax increases and Federal spending cuts - will all hinder full investment potential. The flow of institutional and wealthy private investor capital into the secondary markets along with the low interest rate environment and a subtle climb in prices and rents will fuel the San Diego market throughout 2013. The determining factor will be the availability of preferred product and its ability to propagate to match investor demand. 2. Federal Reserve, The July 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, July 2012 3. Real Capital Analytics, Mid-year Review 2012 Distress Update As for the debt market, life insurance companies will maintain their current supply while selectively competing for top deals. Commercial banks will preserve the majority of assets and CMBS will continue its resurgence as it competes for more transactions. Commercial real estate fundamentals will persist combined with a rising supply of debt and favorable interest rates through 2013. 1. Real Capital Analytics, Inc., based on sales of properties and portfolios $5 million and greater. 54
San Diego Multi-Family Forecast 55
San Diego Multi-Family Forecast The First to Fully Recover & Begin Expansion The San Diego multi-family market has continued to act as a beacon of hope for the larger regional commercial real estate market, becoming the first sector to make a full transition from the recovery phase into expansion mode. 2012 was met with tight vacancy rates and an influx of new national landlords entering the investment arena. Despite an uptick in new construction and development, the outlook for San Diego s multi-family market in 2013 should remain defined by high occupancy and modest rent growth as demand for rental residencies continues to outplace supply. Investment Activity: For the first time since the bottom of the recession, multi-family sales activity in San Diego witnessed a decline in yearover-year transaction volume, not due to a lack of investor interest but to the shortage of supply with landlords less motivated to sell. The total sales volume for multi-family properties of all sizes countywide was $904.1 million in 2012, a 27.9% decrease compared to 2011. 1 Top buyers in San Diego County in 2012 based on total sales volume were R&V Management Corp. accounting for 12.7% of all sales transacted followed by JH Real Estate Partners (7.3%) and Greystar RE Partners (7.2%) (Figure 1 and 3). Among the top sellers were Garden Communities SW, R&V Management Corp., and BlackRock. As the primary markets such as New York and San Francisco continue to lack supply and experience fierce competition among buyers, it is clear that private equity funds and institutional investors are Fig. 1 Multi-Family Buyers & Sellers in 2012 San Diego County Top 10 Buyers Rank Buyer Buyer Type Acquisitions (in millions) 1 R&V Management Corp Private $115.1 2 JH Real Estate Partners Private $66.0 3 Greystar RE Partners Private $64.9 4 Standard Property Co Private $23.0 5 Triumph Management Co Private $20.1 6 Conrad Prebys Private $20.1 7 AIMCO Public $19.7 8 Dornin Investment Group Private $16.5 9 Highland Property Advisors Private $15.3 10 Efren R Cota Trust Private $14.7 Top 10 Sellers Rank Buyer Seller Type Dispositions (in millions) 1 Garden Communities SW Private $91.0 2 R&V Management Corp Private $89.5 3 BlackRock Institutional $64.9 4 Essex Property Trust Public $28.3 5 Davlyn Investments Inc Private $24.1 6 Steadfast Companies Private $23.3 7 Genton Property Group Private $19.7 8 Efren R Cota Trust Private $17.5 9 BRE Properties Public $12.6 10 WLA Investments Private $8.0 57 Rankings based on the amount of acquisitions/dispositions. Source: CoStar; Real Capital Analytics.
finding the secondary markets such as San Diego a more attractive place to invest. Smaller apartment complexes, defined as those with less than 100 rentable units, have seen strong sales and contributed to more than half of the total volume of transactions. Larger communities with over 100 units witnessed a decline in investment activity compared to 2011 (Figure 2). This can be attributed in part to the number of trophy properties that have already traded at cap rates near, or even slightly below, 6% in the previous year. As the multi-family market continues to excel past recovery, the share of distressed transactions has faded. The amount of foreclosed properties and delinquent loans countywide decreased significantly from $97 million recorded in 2011 to $56 million recorded in November 2012, representing only 1.5% of the total multi-family distress on the entire west coast. 2 This conveys the strength of San Diego s multi-family market, highlighting it as the leading property type in rebounding from the Millions Fig. 2 Multi-Family Sales Volume in San Diego County Comparing Sales Volume of 10-99 units vs. 100 units + $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 recession. $942 $938 $692 $714 $2,022 $1,098 $1,324 $902 The historically low cost of debt and strengthening market fundamentals has also fueled this sector s recovery. Current 10-year fixed rates have fallen below 4.0% and lenders have become aggressive as more debt providers have entered the market. Given the low interest rates and continued growth in the apartment sector, various sources of new capital have entered the debt-placement market from CMBS lenders, life insurance companies and commercial banks. In 2012, $981 $2,115 $349 $487 $416 $446 $295 $517 $225 $215 $755 $387 $350 $370 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YTD Source: CoStar. Sold Transactions Only. 2012YTD as of 12/18/2012. competition between buyers and sellers increasingly became fierce and will only continue to heat up in 2013. The multi-family sector has emerged as one of the most sought after property types for investors, with focused interest on key urban properties in prime markets. This held true in 2012 for both private investors and national REITs, whose fierce competition in the acquisition of trophy properties have driven cap rates to all-time lows. Ample sources of low-interest financing combined 58
San Diego Multi-Family Forecast with limited supply and a shift in attitudes towards rent vs. own will continue to position San Diego as one of the hottest multi-family markets in the country throughout 2013. Development & Construction: In 2012, San Diego witnessed a surge in groundbreaking developments. Multi-family starts continued to ramp up as developers broke ground on a number of projects throughout the county. Noticeably, the majority of projects that have begun construction are located in San Diego s downtown area, predominantly in the East Village and Little Italy neighborhoods (Figure 4). This is no surprise as these areas offer the walkability, access to public transportation, and an urban live, work, play lifestyle coveted by the young generation of renters. This demographic is the target behind such developments as the IDEA district - a master-planned mixed-use development proposed to result in nearly three million SF of new residential, retail, hotel and office space. It will consist of 93 acres of sustainable, mixed-use development. 3 The IDEA development comes on the heels of other large projects in the area, most noticeably the recently completed Thomas Jefferson School of Law and the San Diego Central Library. Projects in the East Village have positioned the area to become one of the fastest-growing and most vibrant neighborhoods in San Diego. Multi-family developers have already begun to take notice. Pinnacle Developments, the Canadianbased company behind the popular Pinnacle Museum Tower in the Marina District, have plans for two residential towers and a park at the intersection of 15th and Island. This project will be one of the first to break ground that promises to transform the area. The two towers will consist of 965 units and over 17,000 SF of retail space. 4 Vacancy Rates: San Diego has long held the distinction of being one of the most sought after places to live; a fact that is reflected in its home prices and affordability index. The Fig. 3 Key Sale Transactions 2012YTD Property SF Seller/Buyer # of Units Price Price/SF Price/Unit Submarket Legacy Apartment Homes 351,336 Garden Communities LLC/R&V Management Corporation 412 $91,000,000 $259.01 $220,874 Mira Mesa/ Miramar Forest Park Apartments 253,566 R&V Management Corporation/JH Real Estate Partners, Inc. 338 $44,500,000 $175.50 $131,656 East County Adagio 116,054 Davlyn Investments, Inc./R&V Management Corporation 143 $25,500,000 $219.73 $178,322 East County Hidden Hills Apartments 141,980 R&V Management Corporation/JH Real Estate Partners, Inc. 154 $21,500,000 $151.43 $139,610 Vista Villa Real Apartments 92,930 Helix Associates/Triumph Properties Group 163 $20,100,000 $216.29 $123,313 Carlsbad Broadway Lofts 75,436 Genton Property Group/AIMCO 84 $19,700,000 $261.15 $234,524 Downtown Source: Cassidy Turley San Diego and CoStar. 2012YTD as of 11/30/12. 59
Fig. 4 Top Projects Under Construction San Diego County Rank Property Name Location Submarket # of Units Acres Developer 1 Casa Mira View 11195 Westview Pkwy. Mira Mesa/ Mirmar Anticipated Completion 1,848 6.65 Garden Communities 2013 2 15th & Island 15th St. & Island Ave. Downtown 617 1.4 Pinnacle International 2014 3 Carmel Pacific Ridge 5945 Linda Vista Rd. Linda Vista 533 13.12 Carmel Partners 2013 4 Torrey Hills Apartments Calle Mar De Mariposa & W Ocean Air Dr. Del Mar Hts./ Carmel Valley 484 7.7 Garden Communities 2013 5 Hanover Market Street 13th St. & Market St. Downtown 264 1.89 The Hanover Company 2014 6 15th & Market 15th St. & Market St. Downtown 241 1.4 7 Ariel Suites 701 Beech St. Downtown 224 0.7 8 Olympic Pointe East 9 Olympic Pointe West Olympic Pkwy. & Wueste Rd. Olympic Pkwy. & Wueste Rd. Chula Vista 218 10.1 Chula Vista 209 9.5 10 Broadstone 1902 Kettner Blvd. Downtown 201 1.4 Holland Partners Group Management, Inc. Property Management & Development ColRich Group/ Resmark Apartment Living ColRich Group/ Resmark Apartment Living Alliance Residential Company 2015 2013 2013 2013 2013 Source: Peirce Eislen; Market Point Realty; CoStar combination of housing demand and a high barrier of entry for purchasing ensure strong demand for apartments and rental communities. Vacancy rates have been steadily decreasing since the recession, peaking at 5.26% in 2007 and steadily declining to 4.5% in 2012 (Figure 6); a level considered by landlords as ideal for the industry. The North County Coastal market displayed the lowest vacancy rate of 3.87% followed by South County with 4.55% and the Highway 78 Corridor with 4.61% (Figure 7). Despite a recent burst of new apartment development in some markets, San Diego should expect to see vacancy rates reach 4.2% in 2013. This decline will be further supported by the surge in rental demand influenced by the Generation Y demographic, also known as the Echo Boomers along with the large population of aging Baby Boomers. In comparison to other product types in the market as well as other metros across the nation, although vacancy rates have increased, they have remained healthy and hovered around 5% for more than a decade. Rental Rates: San Diego has experienced nominal rent growth 60
San Diego Multi-Family Forecast 61 Fig. 5 Top 10 Largest Multi-Family Landlords San Diego County Top 10 Landlords Rank Landlord 1 Progress Management 2 R&V Management 3 Equity Residential 4 Archstone 5 BRE Properties, Inc. 6 Hanken Cono & Assad Company, Inc 7 AvalonBay Communities, Inc. 8 Garden Communities LLC 9 Irvine - Woodbridge Apartments 10 AIMCO Rankings based on SF representation. Source: CoStar. Fig. 6 Multi-Family Vacancy Rate in San Diego County 6% 5% 4% 3% 2% 1% 0% 2.54% 2.25% 1.84% 5.26% 4.74% 4.37% 4.17% 4.54% 4.50% 4.20% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f Source: MarketPointe Realty Advisors. (f) forecast by Cassidy Turley San Diego. with an average of 1% increases per year for the last five years. This year, the northern coastal market, comprised of submarkets stretching from La Jolla to Carlsbad, continued to command the highest rental rates of $1,715 per month, reflecting a 24% rent premium over the countywide average of $1,375. 5 Comparing submarkets, Downtown remains the most expensive place to rent, with monthly rates averaging $1,771. Looking ahead, rent growth for multi-family units is poised for substantial increases as 2013 should see an end to this trend of moderate bumps. Some higher-end apartment communities in well-located areas have already begun to experience this growth. This trend will be further exacerbated by the modest increase in inventory in San Diego for the next several years. The County will add an average of 2,000 units a year until 2016. 6 This is well below the pipeline of comparable major markets and represents less than a 1% increase to the total rental market for San Diego per year. As of October 2012, San Diego
employers added 23,500 jobs to their payrolls aside from the 32,800 year-over-year jobs added in July 2012, which was the largest month for year-over-year job gains recorded in San Diego in over 10 years. 7 The majority of the recent job growth was comprised of low to moderate wage sectors which should fuel rental demand for the multi-family market. However, it seems as though the multi-family sector is not the only segment benefiting from recent economic improvements. As of November 2012, San Diego singlefamily home sales were up 16% yearover-year, and median home prices rose 17% annually to $408,000 the largest annual increase seen in more than a decade. 8 Although San Diego has experienced a recent increase in residential sales activity and the cost to own has slightly fallen below that of renting (Figure 11), this poses no imminent threat to the multi-family sector. Due to strict lending standards enacted after the financial crisis, potential homeowners are being thwarted by cash-rich investors who are gobbling up the small amount 3-Bedroom 7.8% Fig. 7 Vacancy Rate by Market San Diego County Submarket Area September-12 March-12 September-11 East County 4.11% 4.48% 5.19% Highway 78 Corridor 4.61% 4.45% 4.49% Interstate 15 Corridor 4.50% 4.64% 5.29% North County Coastal 3.87% 4.43% 3.54% San Diego Central 5.04% 4.32% 4.55% South County 4.55% 4.39% 4.25% Countywide 4.50% 4.43% 4.49% Bedroom Category September-12 March-12 September-11 Studio 4.60% 3.95% 3.96% 1-Bdrm 4.25% 4.21% 4.47% 2-Bdrm 4.55% 4.52% 4.51% 3-Bdrm 5.23% 5.01% 4.78% 4-Bdrm 6.06% 7.60% 3.85% Countywide 4.50% 4.43% 4.49% Source: MarketPointe Realty Advisors. 1-Bedroom 35.4% Fig. 8 Multi-Family Inventory Breakdown San Diego County Studio 3.5% 4-Bedroom 0.2% 2-Bedroom 53.1% Source: MarketPointe Realty Advisors. Studio 4,347 1-Bedroom 44,232 2-Bedroom 66,379 3-Bedroom 9,754 4-Bedroom 264 Total Existing Inventory 124,976 East County 377 Hwy 78 Corridor 306 Interstate 15 Corridor 2,224 North County Coastal 790 San Diego Central 4,921 South County 2,036 Total Future Inventory: Proposed Units 10,654 62
San Diego Multi-Family Forecast 63 Fig. 9 Multi-Family Vacancy Rates in San Diego County Comparing Vacancy Rates of properties built before 1998 vs. after 1998 8% 7% 6% 5% 4% 3% 2% 1% 0% 1.9% 1.7% 3.4% 2.4% Built before 1998 Built after 1998 4.7% 1.7% 4.9% 4.2% 4.6% 4.1% 4.8% 4.5% 7.1% 3.8% 2006 2007 2008 2009 2010 2011 2012YTD Source: MarketPointe Realty Advisors. Fig. 10 Multi-Family Rental Rates in San Diego County Comparing Rental Rates of properties built before 1998 vs. after 1998 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $1,159 $1,690 $1,197 $1,751 Built before 1998 Built after 1998 $1,239 $1,812 $1,760 $1,749 $1,216 $1,205 $1,816 $1,243 $1,251 $1,843 2006 2007 2008 2009 2010 2011 2012YTD Source: MarketPointe Realty Advisors. of supply and capitalizing on rock bottom prices. In addition, lingering fears of a lack of job security have driven potential homeowners, even those who have the financial means to purchase, to remain renters so they can retain the flexibility to relocate if employment changes in the future. Therefore, despite the recent signs of modest recovery in the singlefamily housing market, this does not necessarily translate to less demand for apartment rentals. Moving into 2013, landlords should expect to see at least a 3.5% bump in rental rates and a spike in operating revenues assuming the job market continues to improve and supply levels remain below demand. Demographics & Demand: San Diego remains one of the strongest multifamily markets nationally fueled by its moderate economic improvement, numerous barriers to entry, limited supply, and positive demographic trends consisting of a growing rental population (Generation Y and Baby Boomers). In 2012, San Diego witnessed a decline in unemployment from 9.8% a year ago to 8.6%
currently. This rate is forecasted to continue to moderately decline to a near pre-recessionary level of 5.4% by 2016 (Figure 13). In San Diego, the Echo Boomer generation (ages 16 34) is the largest in the county currently estimated to be over 959,000 people in which 460,000 are of the prime renting age (ages 25 34)(Figure 14 and 15). As this generation enters the housing market, they are faced with high student loan debt, less job certainty, stricter lending standards when purchasing a home, and a shift in lifestyle preferences such as delaying marriage. All of these factors contribute to a generation that is more apt to rent than to buy out of necessity and convenience. Countywide, this age group is forecasted to increase by 51,856 people or 11.3% by 2020. With San Diego s influx of high tech and bio tech jobs luring a young highly skilled labor force, this cohort will continue to supply the demand for rental communities, especially for Class A properties. On the other end of the spectrum many of the parents of Generation Y, The Baby Boomers (age 45 64), are now empty nesters. Instead of trying to balance an abundance of living space with a crippled retirement account through their golden years, many are deciding to downsize the family home and rent in multi-family communities. Due to increasing life expectancy and medical advances, demand for senior housing is on the rise. In hindsight, the 65 and older population is forecasted to increase by 143,023 people or 38.0% by 2020. Payment Regardless of the recent rebound of $1,061 $1,123 $1,158 $1,195 $1,241 $1,290 the single-family purchase market in San Diego, the multi-family rental market boasts strong fundamentals that will match or outpace the supply of multi-family inventory in the county. 2013 will see vacancy rates continue their decline towards pre-recession lows and will see rents break free of the modest bumps of the past several years. 1. CoStar Group, Inc. 2. Real Capital Analytics, Inc. 3. http://ideadistrictsd.com/ 4. http://www.ccdc.com/projects/major-downtown-projects/ projects-landing-page/east-village/804-15th-a-island.html 5. MarketPointe Realty Advisors, Rental Trends September 2012 6. How many rentals will San Diego add until 16?, San Diego Union Tribune, November 7,2012 7. U.S. Department of Labor, Bureau of Labor Statistics 8. San Diego Association of Realtors Fig. 11 Cost to Rent vs. Own in San Diego County $3,500 $2,500 $1,500 $500 $1,838 Avg. Price to Rent: an Average for All Bedroom Categories Countywide Avg. Price to Own an Existing Single Family Home - an Average Mortgage Payment* $1,998 $2,593 $2,858 $3,015 $2,927 $1,855 $1,551 $1,520 $1,343 $1,321 $1,310 $1,392 $1,338 $1,356 $1,469 $1,357 $1,375 $1,409 $1,445 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f Source: Market Pointe Realty Advisors, California and National Association of Realtors, and Freddie Mac. (f) forecast by Cassidy Turley San Diego. Beacon Economics 2012 San Diego Economic Forecast. *Avg. county mortgage payment is calculated by taking the national average 30 year fixed rate and median sales price of an existing single family home in San Diego County. Assumes 20% down payment. 64
San Diego Multi-Family Forecast Fig. 12 Housing Affordability in Comparison California Association of Realtors Traditional Housing Affordability Index (HAI) State/Region/County Q3 2012 Q3 2011 Q3 2011 HAI California Single-Family Existing Home Median Home Price Monthly Payment Including PITI Minimum Qualifying Income 49 51 51 49 $339,860 $1,650 $65,810 CA Condo/Townhome 60 62 62 60 $258,070 $1,250 $49,980 Los Angeles Metropolitan Area 51 53 53 51 $314,090 $1,520 $60,820 Inland Empire 68 70 69 68 $193,910 $940 $37,550 San Francisco Bay Area 35 35 38 35 $568,040 $2,750 $110,000 United States 67 67 66 67 $186,100 $900 $36,040 Southern California Los Angeles 42 49 42 42 $355,700 $1,720 $68,880 Orange County 34 35 33 34 $560,320 $2,710 $108,510 Riverside County 63 65 65 63 $226,660 $1,100 $43,890 San Bernardino 77 78 77 77 $146,070 $710 $28,290 San Diego 43 44 42 43 $394,390 $1,910 $76,370 Ventura 47 48 45 47 $432,540 $2,090 3-Bdrm The California Association of Realtor s (C.A.R.) Housing Affordability Index (HAI) measures the percentage of all households that can afford to purchase a median-priced, singlefamily home in California. The Index is considered the most fundamental measure of housing well-being for home buyers in the state. According to the 3Q12 data, HAI in San Diego was 43 compared to 67 in the U.S. and 49 in California. In comparison, the HAI in San Diego was 11 in 2006, 16 in 2007, 36 in 2008, 38 in 2009, 40 in 2010 and 45 in 2011. Source: California Association of Realtors (C.A.R.) Release date: 11/12/2012. 16% Fig. 13 Unemployment Rate in Comparison San Diego Santa Ana Los Angeles Riverside U.S. 14% 12% 10% 8% 6% 4% 2% 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f 65 Source: Moody s Economy.com www.economy.com. Precis METRO August 2012.
Fig. 14 Population by Age Group 2010 vs. 2020 San Diego County California Association of Realtors Traditional Housing Affordability Index (HAI) Total Population 14 & younger 15-19 20-34 35-44 45-59 60-64 65-74 75 & older 2010 3,095,313 596,168 225,095 741,672 420,563 611,079 149,311 180,554 170,871 2020 3,535,000 709,748 238,916 762,113 432,371 660,017 209,637 309,111 213,087 Net and Percent Change by Age Group from 2010 to 2020 Net Change 439,687 113,580 13,821 20,441 11,808 48,938 60,326 128,557 42,216 % Change 14% 19% 6% 3% 3% 8% 40% 71% 25% Population by Age Group as a Percent of Total Population in 2010 and 2020 2010 100% 19.3% 7.3% 24.0% 13.6% 19.7% 4.8% 5.8% 5.5% 2020 100% 20.1% 6.8% 21.6% 12.2% 18.7% 5.9% 8.7% 6.0% Between 2010 & 2020, this age group is forecasted to increase decrease decrease decrease decrease increase increase increase Source: SANDAG, Regional Growth Forecast. Fig. 15 Population by Age Group in San Diego County 2010 2020 800,000 19% 3% 8% Year Total Population 2010 3,095,313 2020 3,535,000 Net Change 439,687 % Change 14% 600,000 3% 400,000 71% 6% 40% 25% 200,000 0 14 & younger 15-19 20-34 35-44 45-59 60-64 65-74 75 & older Source: SANDAG, Regional Growth Forecast. 66
About The Partnership About the Partnership Cassidy Turley San Diego s research capabilities are built on our local expertise in the markets that we serve. Our extensive market coverage across San Diego County remains a critical component in understanding the dynamics of the commercial real estate market. Our data collection and tracking process for properties and transactions as well as our broad capabilities to serve all aspects of real estate transactions (from investment to leasing to management) provide us with a unique opportunity to join forces with SDSU s Corky McMillin Center for Real Estate and The National University System Institute for Policy Research to develop an accurate and informative forecast for the 2013 San Diego commercial real estate market. These academic institutions provide valuable, unbiased and credible information developed from their vast array of statistical models and methods of data collection. Together, we analyzed trends and relationships between key economic indicators and used that knowledge to predict the direction of the market. This information will help our professionals and clients develop a better understanding of important issues and trends that impact commercial real estate locally and nationally. About The Corky McMillin Center for Real Estate at San Diego State University The Corky McMillin Center for Real Estate is part of the College of Business Administration at San Diego State University. It was developed to further real estate education and research across the University. One of the primary missions of The Center is to promote high quality real estate research because research on current real estate issues enhances understanding of markets, strategies and policies for students and the industry. About The National University System Institute for Policy Research The National University System Institute for Policy Research is a groundbreaking, independent economic think tank that promotes high quality economic, policy, and public-opinion research to improve the efficiency and effectiveness of local governments in the San Diego region. The Institute continually conducts research and publishes articles, policy briefs, and other materials about regional issues, including municipal government, economic policy, housing, transportation, infrastructure, and fire preparedness. 67
SDSU AD The College of Business Administration is fully accredited by AACSB International - The Association to Advance Collegiate Schools of Business Mayor Jerry Sanders (left) presents The Corky McMillin Center for Real Estate Day proclamation to Mark McMillin (center) and Scott McMillin. Producing Top Talent Real Estate Professionals Since 1958 Dedicated to Enhancing Real Estate Education, Promoting Research & Adding Value to the Real Estate Industry Visit our website for upcoming industry events. www.sdsu.edu/realestate realestate@projects.sdsu.edu 619.594.8328 Support the Corky McMillin Real Estate Center Today! http://www-rohan.sdsu.edu/~realest/support.html 11355 N. Torrey Pines Road La Jolla, CA 92037 www.nusinstitute.org The National University System Institute for Policy Research, LLC, (NUSIPR) is a non-partisan organization that formulates and promotes high quality economic, policy, and public-opinion research so as to improve the efficiency and effectiveness of local governments in San Diego County and to improve the quality of life enjoyed by the region s citizens. For more information visit www.nusinstitute.org The Institute is an affiliate of the National University System established in 2001 by National University to meet the emerging challenges and demands of education in the 21st century. The System is uniquely aligned to connect a diverse population of students to a network of innovative educational programs that are relevant to their lives, careers, and the marketplace and are delivered in a format that respects competing life priorities. For more information visit www.nusystem.org 68
69 San Diego - UTC (Headquarters) 4350 La Jolla Village Drive, Suite 500 San Diego, CA 92122 T 858.546.5400 F 858.630.6320 San Diego - Carlsbad 1000 Aviara Parkway, Suite 100 Carlsbad, CA 92011 T 760.431.4200 f 760.454.3869 San Diego - Downtown 350 10th Avenue, Suite 910 San Diego, CA 92101 T 619.515.0017 f 619.515.0020 San Diego - Otay Mesa 8780 Sherwood Terrace San Diego, CA 92154 T 619.661.0657 f 619.661.1869 San Diego - East County 2295 Fletcher Parkway, Suite 200 El Cajon, CA 92020 T 619.462.4500 f 619.462.7100 www.cassidyturley.com/sandiego About Cassidy Turley Cassidy Turley is a leading commercial real estate services provider with more than 3,700 professionals in more than 60 offices nationwide. The company represents a wide range of clients from small businesses to Fortune 500 companies, from local non-profits to major institutions. The firm completed transactions valued at $22 billion in 2011, manages 455 million square feet on behalf of institutional, corporate and private clients and supports more than 28,000 domestic corporate services locations. Cassidy Turley serves owners, investors and tenants with a full spectrum of integrated commercial real estate services including capital markets, tenant representation, corporate services, project leasing, property management, project and development services, and research and consulting. Cassidy Turley enhances its global service delivery outside of North America through a partnership with GVA, giving clients access to commercial real estate professionals in 65 international markets. Please visit www.cassidyturley.com for more information about Cassidy Turley. Cassidy Turley provides regional real estate services with local market leader Cassidy Turley San Diego. The company s dominant market presence includes more than 160 professionals and staff in five local offices and recorded more than $1.2 billion in transactions in 2011. For more information about Cassidy Turley San Diego, please visit www.cassidyturley.com/sandiego or contact Dan Broderick, President and CEO of Cassidy Turley San Diego.