SAN DIEGO—Local clients are looking outside of the San Diego market for higher-risk/higher-return investment opportunities, particularly in high-job-growth markets like Seattle, Austin, Denver and Phoenix, Scott Peterson, senior VP, debt and structured finance, for CBRE Capital Markets, tells GlobeSt.com. According to a recent report from CBRE Research, prices in the region were up for most property types, despite a slower-than-average half in sales volume and properties sold. Sales volume should rebound, since several major properties went on the market in the first half and are expected to close by year-end.

We spoke with Peterson about the main takeaways from the report, where he sees sales activity and cap rates heading for this region in the near future and what investors are seeking here that they can't find.

GlobeSt.com: What are the main takeaways from your latest San Diego Capital-Markets Trend report?

Peterson: The San Diego market continued to be attractive for investors and property owners. Cap rates continued to remain low across most property types, despite a slightly slower quarter in terms of overall transaction activity. Average sales prices were mostly up across the board, which contributed to lower cap rates. The takeaway here is that all real estate asset classes continue to have solid market fundamentals with high prices. Those high prices and tight economics have slowed transaction volume as buyers struggle to find high-growth, high-yield opportunities.

GlobeSt.com: Where do you see this region's sales activity and cap rates heading for the remainder of the year and into 2018?

Peterson: We expect to see activity increase in the second half of the year for most property types, primarily a result of demand to place capital. Buyers have capital and need transactions. The numbers are not reflected in the report, but several major properties hit the market in the first half and many are either in the closing process or are expected to close by year-end. Cap rates should remain low as market fundamentals like low vacancy and steady or increasing lease rates keep investments attractive. With tight vacancy, minimal construction activity and steady regional job growth, there is no reason to expect otherwise.

GlobeSt.com: What are investors seeking in San Diego that they can't find?

Peterson: High risk, high yield. Market fundamentals continue to be healthy. Vacancy rates remain low, leasing activity is stable and rental rates are at or near historic highs, therefore the market provides a lot of stability for investors seeking a steady revenue from their investments. That said, there are very few opportunities with high risk profiles to get higher yields. Rather than value-add/opportunistic funds, this has driven a lot of private investors to the market, who are often looking for stability in their investments. Even with these favorable market conditions, new construction remains relatively low compared to the size of the market and what we have observed in previous cycles. Multifamily properties in particular remain very attractive as lease rates continue to climb year-over-year and occupancy is near 100% in the region. This has driven cap rates down to 4% to 5%, and in some cases below 4%.

That said, we continue to see local clients look outside of the San Diego market for higher-risk/higher return investment opportunities, particularly in high job-growth markets like Seattle, Austin, Denver, and Phoenix.

GlobeSt.com: What else should our readers know about San Diego's capital-markets sector?

Peterson: The market still has runway to see even more activity in the near future, especially with financial markets offering favorable terms for borrowers. At least for San Diego, we've yet to see interest from foreign investors translate into closed sales. As these investors look beyond the gateway markets like New York and Los Angeles, San Diego could benefit from an expanded pool of potential buyers. Higher lease rates and limited space availabilities for tenants are also making tenants more interested in becoming owner-users, so we see the potential for even more activity on the horizon.

We also expect to see more commercial development here in San Diego. As apartment construction has been the darling, land availability and construction costs are making it more difficult to build locally. With good redevelopment and commercial-land opportunities (as already seen in the Carlsbad and Otay Mesa industrial markets), commercial construction will pick up as the low vacancy pushes rental rates into the spectrum of making office and industrial construction more viable.

GlobeSt.com: What are the main takeaways from your latest San Diego Capital-Markets Trend report?

GlobeSt.com: Where do you see this region's sales activity and cap rates heading for the remainder of the year and into 2018?

GlobeSt.com: What are investors seeking in San Diego that they can't find?

GlobeSt.com: What else should our readers know about San Diego's capital-markets sector?

Instant Insights /

Buyers Struggle to Find High-Yield Opportunities

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