San Diego San Diego

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San Diego's net lease market is thriving. According to a reportfrom CBRE, San Diego led the nation inyear-over-year net lease investment volume gains. Office and retaildeals were integral to the market growth in 2019. Office salesincreased 2.5% and retail sales grew 2.4%. Overall, net leaseassets increased 110% year-over-year.

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"San Diego is on sale compared to the rest of SouthernCalifornia, like L.A. and Orange County," MattPourcho, SVP at CBRE, tells GlobeSt.com. "If a deal is a6% cap rate in Los Angeles, it is a 6.5% to 6.75% cap rate in SanDiego. So, San Diego has been trading at a discount to Los Angelesand Orange County, meanwhile the fundamentals of San Diego areunbelievable. We have had new companies come here, and tech andlife science are expanding. If you are going to boil it down, thegrowth is really about fundamentals and yield."

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Most of the buyers in San Diego are chasing yield, coming fromother Southern California markets like Orange County and LosAngeles. The Inland Empire was also a top market for net leaseinvestment last year, ranking second for year-over-year investmentgains. "Over 90% of our buyers have sold to outside of San Diego,and primarily Los Angeles and Orange County. They are generallyhigh net worth family office buyers," says Pourcho.

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Office and retail led the market activity, with industrialseeing a 4.9% decline in investment volume, according to thereport. However, it isn't due to lack of demand but rather the lackof industrial opportunities. "You just can't find industrial deals.Industrial is very hard to come buy because it requires low capitalexpenditures," says Pourcho. "All of the volume of industrialproduct has likely already sold. For that reason, we are seeing ahigh percentage of office deals."

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In addition, the yield opportunities are better in office thanin industrial. "There are a lot of investors selling officeproduct, and for investors, it offers a great yield. With interestrates as low as they are right now, you can buy at a 6.7% cap ratewith interest-only debt, you could get above a 7% return,cash-on-cash," says Pourcho. "You can't do that in industrial."

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This year, Pourcho expects to see similar growth in the netlease market. "My outlook is positive. I look at the fundamentalsof unemployment being at record low, and I see record defensespending helping the office and industrial markets," he says. "Isee Apple expanding here; I see Google expanding here. This willhelp fuel absorption and positive sentiment of San Diego buyers,and it will fuel out-of-town investors coming to San Diego."

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.