Why Developers Won't Consider San Diego

SAN DIEGO—A long approval process and serious opposition from various groups have been stymying new development in this market, according to Norm Miller, PhD, who was recently named the Ernest W. Hahn Chair of Real Estate Finance at the Burnham-Moores Center for Real Estate at the University of San Diego. We caught up with Miller recently and chatted with him exclusively about his new position, capital-markets concerns in San Diego and other aspects of CRE finance in this market.

GlobeSt.com: What are your goals in your new position as chair of real estate finance at USD?

Miller: To build on the reputation of the Burnham-Moores Center for Real Estate, attract more talent into our programs nationally and international and continue to try and serve the region with some relevant research on land-use policies and market outlooks.

GlobeSt.com: What are the greatest concerns in the capital markets with regard to San Diego commercial real estate?

Miller: There is sufficient capital available in San Diego in terms of equity and debt. Even the CMBS market is coming back, and mezzanine financing is available again, although loan-to-value ratios are more conservative than pre-2007. The largest single concern has been whether to go long term or short term (variable) and when interest rates will increase. I have been wrong on that score for a while, expecting significant increases by now, so those who used shorter-term debt have come out winners, but I'd still consider locking in longer-term debt soon and banking on interest rates rising slightly over the next few years.

GlobeSt.com: How does San Diego compare to other Southern California market with regard to lenders' willingness to finance?

Miller: We have solid banks here and plenty of capital. I'd say the only concerns here that are unique for lenders would be financing commitments on construction loans and new development. It simply takes too long here to gain entitlement on anything new or of any scale with too much blackmailing and blood-letting by all the various groups that think they can pull out something or stop you because they claim traffic will kill their kids or they own a competing property across the street.

GlobeSt.com: What other trends are you noticing in the San Diego commercial real estate finance realm?

Miller: The good news is that One Paseo finally got approved. The bad news is how long it took to get approved and all the extractions pulled out by the City Council prior to approval. Anyone who learns of that story will say, “I'll build my new factory or office headquarters in another market.” Our regulatory environment here—CEQA, the California Coastal Commission and the City Council—spells a much more stymied economy than otherwise. We have some great tech firms here, but when they expand it will likely be elsewhere. What is so sad is that these are curable problems. We could make housing more affordable by allowing smaller-scaled units without subsidies, but no community will approve it. We could also become business friendly, and we could allow and encourage dense mixed-use projects that lower transport costs and help the environment, like One Paseo, but instead we see large-lot developments in Encinitas and almost nothing in many other communities like La Jolla or Del Mar. Then the community asks why real estate is so expensive. I see this as the biggest issue, and I am hoping we can somehow get politicians in office that will change our image. It was a business nightmare when Bob Filner was mayor, and it will take a while to change our reputation. But I remain hopeful that we learned some lessons from the high-paying firms that expanded elsewhere and the developers that say they won't even consider San Diego.