The San Diego County office market outlook has turned decidedly positive, according to the recently released Allen Matkins UCLA Anderson Forecast.
- The industrial building outlook has dropped slightly since the June survey but it is still considered positive.
- But the survey of developers, lenders and various real estate institutions for retail real estate is more pessimistic since Congress approved tax cuts late last year.
- The report said the tax changes make commercial real estate more attractive because of a more liberal treatment of pass-through income to investors and deductions based on the value of corporate-owned structures. Investors are now considering “getting back in the game.”
- “The only fly in the ointment is in brick-and mortar retail,” the report said. “Though the 2017 holiday season was relatively good for in-store purchases, there is a general recognition that too much retail space is available. Indeed, restructuring is expected to continue through 2018.”
The outlook is considered positive if the score in each category and in each market is above 50 on a scale of 0-100 and negative if under 50.
Here are some details:
San Diego office scored 53.57, a turnaround from a negative 48.42 in June but roughly the same as in December 2016. Orange County scored 60.84, also up from six months earlier.
"The panel reported that they now view 2020 as decidedly better in both rental rates and vacancy rates than today," the report said. "The shift in sentiment occurred with no change in subleasing, a slowing in the growth of employment and a forecast of falling commercial land prices. A larger percentage of the panel, more than two-thirds, and the highest since 2014, said they would be on the sidelines in the coming 12 months."
A separate compilation of office statistics by the CoStar Group showed that office vacancies in San Diego County's 114.2-million-square-foot market stood at 8.4 percent at year's end, the lowest since 7.5 percent in pre-recession 2005.
Developers and lenders typically dust off office projects when the overall vacancy rate drops below 10 percent. Since it takes about three years to greenlight and complete a major office project, the UCLA report writers believe new projects might be coming back to life by 2020.
In other measurements, CoStar said 725,408 square feet of new office was delivered in 2017, about twice the total in 2016 but still below the million-foot level that was common before the recession.
San Diego's prospects were rated 55.68, down from 56.33 in June and about the same from a year earlier. Orange County was rated at 59.16 and the Inland Empire of San Bernardino and Riverside counties at 55.38.
"In Southern California there was only a modest falloff in sentiment six months ago and a modest increase in December," the report said. "In the latest survey there is an increase in plans to start new projects relative to a year ago, likely caused by imports from Asia that have grown at double-digit rates and a sense that the economy is still growing."
San Diego counts 191.9 million square feet in warehouse, flex (office-warehouse) and industrial space, a relatively moderate inventory, compared with 304.2 million square feet in Orange County, 594.9 million square feet in the Inland Empire and 997.5 million square feet in Los Angeles County.
That discrepancy may be due in part to San Diego's relatively high quoted rental rate of $1.06 per square foot per month, CoStar says. The other rates: Inland Empire, 72 cents; Los Angeles, 93 cents; Orange County, $1.01.
San Diego's industrial vacancy rate stood at 4.2 percent, lower than Inland Empire's but higher than L.A.'s and Orange County's.
San Diego's developer sentiment stood unchanged at 39.58 from the June survey. But that negative outlook wasn't as bad as Orange County's 36.19 and Los Angeles' 33.27.
"If the tax overhaul was supposed to make investment rates of return higher, it did not do nearly enough for this sector," the UCLA report said. "Indeed, the survey panels in each of the six markets are more pessimistic now than they were before the tax bill passed."
Besides San Diego, Orange and Los Angeles counties, the report included retail prospects in San Francisco, its East Bay and Silicon Valley. The Inland Empire was not examined.
CoStar's fourth quarter report provided further detail for San Diego.
The county's 140.6 million square feet of retail logged a vacancy rate of 3.4 percent, its lowest since 2007. The average monthly rent was set at $1.90 per square foot, a return to the previous high in 2009. The delivery of new space in 2017, 835,623 square feet, was nearly double 2016's, but that's principally due to the 400,000-square-foot expansion of Westfield UTC.