Real Estate Forum - September 2011

NEWS FRONT
San Diego Eases Out of Retail Doldrums

SAN DIEGO—Sometimes, just treading water can look like progress. A case could be made that San Diego retail is in that situation, although one could also argue that the market is doing better because absorption is up and a couple of shopping centers have sold recently, one of them for a notable price per square foot.

Mark Caston, senior vice president in Voit Real Estate Services’ San Diego office, says that landlords are still offering concessions to retain tenants and fill space. Regarding rents, he says he has been involved in six lease renewals in the past 60 days, and only one had a rent increase.

Net absorption in the local retail market totaled negative 138,245 square feet in the second quarter, down from positive 174,909 square feet in the previous quarter, according to CB Richard Ellis. Those figures could improve as the year goes on, according to a report from Marcus & Millichap Real Estate Investment Services, which indicates that rising shopping volume and minimal construction activity will accelerate improvements in San Diego retail operations through 2011.

“This lack of a building run-up continues to magnify absorption levels this year, as the amount of space absorbed in the first quarter surpassed levels recorded in the entire second half of 2010,” the report reads. Investors are showing confidence in the market, too. Cornerstone Real Estate Advisers LLC recently bought the 111,403-square-foot Bressi Ranch Village Center in Carlsbad in a sale brokered by HFF on behalf of seller LNR Property LLC. The sale price wasn’t disclosed, but HFF senior managing director Ryan Gallagher says it closed at one of the highest prices per square foot ever recorded for a grocery-anchored center in the county. A source not involved in the deal pegged the price at $58 million, which would put it at nearly $521 per square foot. Elsewhere in the county, a 127,000-square-foot, grocery-anchored retail center called Felicita Town Center in Escondido sold for more than $30.1 million in a deal brokered by Cushman & Wakefield.

Despite these deals and the positive
absorption, the market still faces its chal-
lenges, according to Voit’s Caston. “We
continue to see small local tenants strug-
gle, while national tenants are coming
back to the market and looking for ‘qual-
ity’ locations and reasonable rental
terms,” he explains.—Natalie Dolce u

Real Estate: History That Rhymes

I think it was Mark Twain who said, “History doesn’t repeat itself, but it rhymes.” This statement has never been truer than in real estate. Responding to opportunity is all about timing—history repeating itself.

In America for the better part of 200 years, we have seen all categories of real estate spike, dip, flatten, spike, dip and flatten again. How many charts and graphs over how many eras do you need to see?

If you owned a building in Texas in the 1980s, you sure felt good until you didn’t. And now you might be feeling good again. In Florida, you may have been a genius in the early There was a gold rush in 1849 and people pushed westward to find fortune. In 2011, they’re still in a hurry to get to the left coast, with an expected 20% growth over the course of the next decade.

Because of the expanding population, builders during the boom years had the mantra of, “If you build it, they will come…” ringing in their ears, so shopping center after shopping center went up west of the Mississippi. Developers turned dirt into concrete in communities with strong traffic patterns and stable unemployment, so citizens could shop for necessity items. People will need food and medicine in all economic cycles, they reasoned, and they were right.

The problem was that the developers ran out of money before they could finish the job. Banks stopped lending money after the most recent meltdown (circa 2008) and beautiful new structures without landlords sat ready to feed and medicate Americans.

What was very bad news for those developers also turned sour for banks that inherited prior loans now defaulted. But two wrongs can make a right in real estate, because savvy investors began picking up these structures for $20 million, knowing it would cost $60 million in replacement value alone.

Contractors and banks left holding the proverbial bag aren’t new, but the general public responding to their misfortune is. In the past, only high net-worth individuals, hedge funds and pensions could swoop in. But new rules on what a bank must hold as collateral for defaulted loans have made them dump these properties faster and at deeper discounts.

A byproduct of higher reserves is a stronger and more competitive base. I believe this holds true beyond retail shopping centers in the west and hotels in California. A recent article on GlobeSt.com reported a significant reduction in defaults due to higher capital reserves and stronger lenders.

Expect experienced property and asset managers to get T.L.C. (yes, Tender Loving Care), from aggressive banks that need to dump inventory, primarily in the western US. The resurgence of lending activity will entice investors to get off the sidelines as they have in the past. It’s not a fairy tale, but it looks like it may have a happy ending.

By Christian Gabrielsen

Christian Gabrielsen is the executive vice president and national sales manager at Thompson National Properties LLC in Irvine, CA. He may be contacted at c.gabrielsen@tnpre.com. Tony Thompson, CEO at TNP, contributed to this column. He may be contacted at tt@tnpre.com. The views expressed here are the authors’ own.