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San Diego Developers Wonder When Boom Time Will End

Updated: Jun 24, 2019

Panelists at the Bisnow: State of the Market event in Carlsbad. Left to right: Greg Williams, Stockdale Capital Partners; Brad Termini, Zephyr Partners; Paul Kaseburg, MG Properties; John Kenney, The Casey Brown Co; Seth Grossman, Meridian Capital; and Nathan Moeder of London Moeder Advisors. Phillip Molnar/The San Diego Union-Tribune

At the Bisnow “State of the Market” event Wednesday in Carlsbad, representatives of the region’s biggest developers said there are challenges in San Diego, but also many opportunities to get big tech companies into new developments.

It’s been boom time for San Diego developers for several years, but how long it will last is up in the air.

Some of the region’s top developers gave mixed answers about the future of real estate investment at an event Wednesday in Carlsbad to discuss the state of the market. Attended by about 150 people, the occasion was hosted by digital media company Bisnow and held at the newly constructed Create building.

In general, developers saw potential in bringing big tech firms to the region, especially in new office space. However, they were concerned with high housing costs pushing out potential buyers, as well as talented workers tech companies will need.

The region has also experienced several years of strong investment, but it is unclear if things will significantly slow down. Nathan Moeder, principal with real estate analysts London Moeder Advisors, said it was not surprising that some analysts predict real estate is at its peak, meaning things will go downhill from here. “We really have reached maximum employment,” he said. “We have reached maximum price evaluations.”

Speculative Building

Developers said building office space in San Diego County means constructing new complexes with no set tenant in mind. It can be risky, because lenders typically would like to see a tenant already signed on before they finance a huge project. Greg Williams, a managing director at Stockdale Capital Partners, said it’s necessary for big projects in San Diego County to take a gamble on new office supply because tech companies are not completely sold on the region yet.

Stockdale is working toward a major speculative project — turning Horton Plaza into a tech campus. Williams said once the project is completed, it can have the effect of increasing office rents and demand.

“We are really having to work hard to convince tech companies that are in San Francisco how much talent there is” in San Diego, he said, “what the quality of life is like.”

Williams said he was amazed how quickly Silicon Valley tech companies were willing to go out of state without looking at the value of San Diego.

He said downtown San Diego reminds him of Austin a few years ago, which has now seen a major influx of tech companies into its downtown. Like San Diego’s downtown, he said many of Austin’s businesses wanted to be outside the city center with a reverse commute of many residents out to the suburbs to work.

John Kenney, principal at the Casey Brown Company, said the future was unknown when it began work on the $40 million project to turn the former San Diego Union-Tribune building into high-end office space called Ampersand.

It started work on the project without a major tenant, but in September welcomed its first big tenant — Encore Capital Group, which takes up the entire third floor. He said the company was confident it would be a prime location for businesses, even if others weren’t so sure.

“We took people on tours early on and people looked at the printing press and dirt everywhere and they were like, ‘You are crazy. This will never work.’” he said. “I think to get people to buy into it, they need to see” the final product.

Residential Investment

A lack of high paying tech jobs means the county’s largest working generation, millennials, cannot afford new developments, said Brad Termini, co-founder of Zephyr Partners.

Zephyr is now selling condos at The Park development in Bankers Hill. Units start at $1.4 million. He said 75 percent of the building is sold, but only two buyers were under 50 years old.

“Our average buyer is 60 years old,” he said. “That’s a problem for our community.”

Paul Kaseburg, chief investment officer at MG Properties, said a way to attract tech workers is having places to live in a place people want to be, like San Diego. That works well for real estate investment, but only if enough of those jobs exist.

He said the problem is younger, low-income workers are leaving the region because they can’t afford high housing costs. That means a housing market that won’t grow as much as lower cost places like Las Vegas and Phoenix.

Benefits of San Diego

San Diego County’s real estate market has been busy for years with high-rise residential, and the occasional new office or mixed-use building. Seth Grossman, senior managing director at Meridian Capital Group, said its not as easy to finance a big deal as it used to be, but deals are to be had with enough effort.

“2011, 2012, 2013 2014: I didn’t see a deal I didn’t like,” he said. San Diego developers wonder when boom time will end on, he said things started to get a lot more expensive and the main complaint from his clients are that deals aren’t penciling out to make a good enough profit. He said people are still getting deals done, it just is taking a lot longer.

Grossman said the economy is going well enough that investors have not lost their appetite and low interest rates are sometimes too good to pass up.

In many ways, the San Diego region is still cheaper than much of the West Coast, said John Kenney, of the Casey Brown Company. He said big projects, like the Ampersand project and the Horton Plaza effort, are beginning to change people’s minds about what is available.

“There is starting to be the beginnings of opportunities for those type of larger projects to come into San Diego,” he said. “There’s a really good nexus of components coming together to make this an attractive place for capital to be placed.”

Article Via: The San Diego Union Tribune

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