Office and Retail Drive Big Net Lease Gains in San Diego

San Diego’s net lease market is thriving. According to a report from CBRE, San Diego led the nation in year-over-year net lease investment volume gains. Office and retail deals were integral to the market growth in 2019. Office sales increased 2.5% and retail sales grew 2.4%. Overall, net lease assets increased 110% year-over-year.

“San Diego is on sale compared to the rest of Southern California, like L.A. and Orange County,” Matt Pourcho, SVP at CBRE, tells GlobeSt.com. “If a deal is a 6% cap rate in Los Angeles, it is a 6.5% to 6.75% cap rate in San Diego. So, San Diego has been trading at a discount to Los Angeles and Orange County, meanwhile the fundamentals of San Diego are unbelievable. We have had new companies come here, and tech and life science are expanding. If you are going to boil it down, the growth is really about fundamentals and yield.”

Most of the buyers in San Diego are chasing yield, coming from other Southern California markets like Orange County and Los Angeles. The Inland Empire was also a top market for net lease investment last year, ranking second for year-over-year investment gains. “Over 90% of our buyers have sold to outside of San Diego, and primarily Los Angeles and Orange County. They are generally high net worth family office buyers,” says Pourcho.

Office and retail led the market activity, with industrial seeing a 4.9% decline in investment volume, according to the report. However, it isn’t due to lack of demand but rather the lack of industrial opportunities. “You just can’t find industrial deals. Industrial is very hard to come buy because it requires low capital expenditures,” says Pourcho. “All of the volume of industrial product has likely already sold. For that reason, we are seeing a high percentage of office deals.”

In addition, the yield opportunities are better in office than in industrial. “There are a lot of investors selling office product, and for investors, it offers a great yield. With interest rates as low as they are right now, you can buy at a 6.7% cap rate with interest-only debt, you could get above a 7% return, cash-on-cash,” says Pourcho. “You can’t do that in industrial.”

This year, Pourcho expects to see similar growth in the net lease market. “My outlook is positive. I look at the fundamentals of unemployment being at record low, and I see record defense spending helping the office and industrial markets,” he says. “I see Apple expanding here; I see Google expanding here. This will help fuel absorption and positive sentiment of San Diego buyers, and it will fuel out-of-town investors coming to San Diego.”