Redevelopment Plays Foster Growth in SD

SAN DIEGO—With so little land available here, as with many California coastal cities, adaptive re-use is the order of the day for developers looking to cash in on San Diego's real estate comeback, CBRE's SVP Chris Pascale tells GlobeSt.com exclusively. We spoke with Pascale about areas for opportunity in San Diego real estate, the challenges the market faces and emerging industries.

GlobeSt.com: If vacancy is low, property values are high and there's not much land for development, where is are the growth opportunities in this market?

Pascale: Developers are focused on redevelopment plays and adaptive re-use. They are taking something old and making it newer as opposed to paring it down—the re-use of existing facilities through modernization. It's a place to grow their portfolios, increase values, garner a higher rent and attract talent. Developers in that niche are active and deeply engaged in that process, and from what I can tell, will be very successful.

It started in the UTC and Sorrento Valley areas, and it has since fanned out. We're seeing it in Kearny Mesa, Carlsbad, Rancho Bernardo to a certain extent, and my sense is we'll also see this in Scripps Ranch for some new developments on the drawing board. It will become necessary in all submarkets, and the guys who get in first will be the most successful.

I think we are under-retailed in San Diego across the board, but we are seeing this modernization of older buildings in both office and industrial. There's a lot of bringing the outdoors in and developing collaborative space, which are alternatives to sitting behind a desk. We're also seeing industrial buildings converted by demolition of some square footage to create some of those indoor/outdoor spaces. Owners can claim this space as rentable space, and it increases their parking ratio, so kills two birds with one stone. Adaptive re-use is an interesting way to look at industrial that might be obsolete. The floral trade center in Carlsbad is a prime example of doing a beautiful job with that.

As for where the boom is going to occur, it's niche-y. There's not a surplus of space for development, so developers are picking off buildings in submarkets where there's not a lot of that going on or they try to copy it in submarkets where it has been done successfully. Development in San Diego is tough; the people who own land don't want to sell it because it's a rare commodity and they don't want to give up that opportunity for development. Owners are saying, 'No, thank you, we want to stay and develop.' ”

GlobeSt.com: Aside from the economic drivers of the military, tourism and innovation, what are other drivers to this market?

Pascale: Green tech is a huge thing in San Diego. This market is one of the greenest in the country and has been recognized as such. We're also really proud of our craft-brewing industry, which is huge. It absorbs a lot of space and employs a lot of people. It's a pay-well, feel-good industry. San Diego was the Golden Medal leader in the last Beer Fest. That tells you something. Last year, there were 15 or 20 new microbreweries in San Diego, and there are another 35 on the drawing board. It's probably worth $1 billion in sales this year for San Diego.

GlobeSt.com: What else makes San Diego a unique real estate market?

Pascale: San Diego is a very submarket-driven market, and certain submarkets are becoming very tight, which is a challenge for new development. Current lease rates don't support new development if you want a reasonable return on your risk capital, so somebody's going to have to build for cash. Few people are building on space. Publicly traded REITs can build for cash, and that gives them the nimbleness to get ground-up development approved. The only developer that's different is the Irvine Co., which is a unique model. But Kilroy Realty and American Assets are building in Del Mar Heights on spec. These are the first new office spec buildings being built in more than 20 years.