Will Senate Majority Flip Be CRE's Black Swan Event?

SAN DIEGO—More relevant to CRE than who becomes our next president is whether the Senate majority will change from Republican to Democrat, creating an all-bets-are-off scenario for our industry, Avison Young's principal and managing director of its Southern California region Chris Cooper tells GlobeSt.com. The firm recently hired Corey Martin, Stan Nowak and their agency-leasing and investment sales team in San Diego, making Martin and Nowak principals of Avison Young with a mandate to expand the firm's San Diego and Southwest Riverside Counties' industrial and office sales, leasing, and investment sales practice. In the coming months, Martin will also expand his practice into the Austin market to serve his clients' growing requirements.

We sat down with Cooper, Martin and Nowak for an exclusive chat about the San Diego market, the firm's expansion and what could impact the market going forward.

GlobeSt.com: Why is San Diego a pivotal market for your firm's expansion?

Cooper: We made an early commitment to San Diego, and we are keeping to that commitment, as the addition of this team shows. San Diego is one of the fastest-growing markets in California. This is obviously fueled by a lot of different industries, one of the biggest being biotech. Also, there are major institutional investors in San Diego, including the Irvine Co., Kilroy, some of the big pension funds and Alexandria, so we feel it's important to be part and invest in that growth.

One of the great things about Southern California is it's a very diverse economy: entertainment, white-collar service firms, aerospace and defense, education—that's why we're very bullish on San Diego and will continue to make major investments there.

GlobeSt.com: Chris, what do Corey and Stan bring to that market and the Southern California region that's unique?

Cooper: First of all, a large part of their practice is on the agency-leasing and sales side. We've made significant headway in the property-management arena—we manage more than 1 million square feet of class-A product in the San Diego area, including San Diego Tech Center and other assets—and while on our brokerage side we are very strong, on the tenant-rep side we've definitely had a hole to fill, particularly on the agency-leasing and sales side, in which Corey and Stan and their team are outstanding. Secondly, we are continuing to focus on really growing our industrial practice. We're strong in office, but we want to grow in industrial as well, and they handle both office and industrial clients, so they are a double win for us.

Martin: Over the last 12 years, my primary focus has been on office and industrial agency leasing—that's 85% to 90% of my work—from the standpoint of institutional and private-client groups. To Chris's point, with the new expansion of AY San Diego, the industrial base in San Diego has a lot of market share we can dominate, so I'm looking forward to that.

Nowak: We fill a niche within the San Diego and Inland Empire markets due to our experience and presence in agency leasing, and we've been a client rep both for end users and investment-income properties. For the last 12 years, my experience has been primarily focused on the industrial sector of the market, representing institutional-level clients all the way down to cutting my teeth on mom-and-pops. We've had clients at every level, and we're looking to expand our presence in the San Diego marketplace by coming into the San Diego office with AY.

GlobeSt.com: What leasing trends are you noticing in the San Diego market?

Cooper: I think, along the lines of what Stan just mentioned, the market has priced to a Hillary Clinton victory; however, I also believe it has priced itself to a status of equilibrium, with the Senate and House remaining in control by Republicans so an unforeseen radical agenda is not implemented. If, on the other hand, the Senate were to turn to a Democrat majority—the House won't do this; that's taking it too far—it could have a negative impact on the real estate markets that hasn't been foreseen as much; hence, the Black Swan event. Everybody talks about the political environment, but the trick to all of it is that our country has lived through a lot of shocks, but there's been a sense of political equilibrium. There was shock when Obama was in and controlled the House and Senate and could push through a radical agenda; that's what rocks the boat.

Martin: As far as the office market goes, there's been some positive growth there. There's been an upward trend in the market, but it's not real significant. Average asking rates have been flat since July at $31.30 a foot annually, and we expect that to finish the year at $31.60 a foot. The same for office vacancy: we expect a 14.6% finish. We're in an election year, so there's a bit of a sit-and-wait, see how the economy and markets respond to the election. We will see by mid-first quarter.

As for new deliveries, we've spent some time over the years absorbing excess vacancy and have seen some new deliveries on line in the coastal markets. Since 2006, La Jolla has been the fastest-growing San Diego office submarket, having added about 1.5 million square feet, and this market represents 20% of new completions in San Diego. We've seen a little growth and new deliveries, we've shrunk vacancy, and if the market responds well to the elections, there should be growth in new deliveries, which is a positive change.

Nowak: The San Diego industrial market continued to move toward historic limits since vacancy is now at an all-time low, with asking lease rates setting a new high-water mark. Positive absorption has pushed total vacancy down 20 basis points to only 4.3%, while direct vacancy fell to 3.9%, which is the lowest ever recorded. This can be partially attributed to no new industrial deliveries in Q3, though there is nearly 1 million square feet under construction with the bulk of it found in the Northwest County submarket focused in the Oceanside/Carlsbad area and South County submarket at the San Diego/Mexico border area around Otay Mesa. Sub-5% vacancy can be found in every region. Lack of supply has driven demand and has asking rates on the rise again, also setting a new all-time high average of $1.20 per square foot triple net.

I expect decreased employment-growth rates for industrial users in San Diego to weaken demand and asking rates if the current trend continues. This will also be supported by new supply of approximately 1 million square feet to be delivered in the short-term future.

Barring an unforeseen Black Swan event, I anticipate much of the same, with the current trends continuing as the data suggests. However, for the reason just mentioned, whether or not the current trajectory remains as steep may be in question. Overall, the market sentiment is very positive with a hint of cautious optimism.

GlobeSt.com: What else should our readers know about this expansion?

Cooper: You can anticipate more recruiting in San Diego and expansion in our property-management and asset services down there. We're bullish on San Diego, and there's a lot more to come.

Martin: Culture is important because we spend more time at work than we do with our families. It's not only the business we participate in, but it's the human capital that's important, too, and that has a significant positive impact. There's a high emphasis at AY on honesty and integrity.

The other thing that's extremely important is that AY is one of top two service firms globally. They maintain and foster an entrepreneurial approach to the services they provide, which is unique because when you get to the top two, the culture could be very rigid and not client centric, and that's not the case here. We service the client first, provide out-of-the-box thinking and create solutions that lead to results.

Nowak: Our team elected to make this transition to Avison Young. I'm very excited to be part of the AY team. It's an honor to be brought in as a principal of the company and to be associated with the quality of professionalism that's in this company. The fit had to be just right for us, and that led to our decision. We're coming from a smaller, independently owned franchise company that offered us autonomy, but it also lacked the high-level tools and service lines of a larger, more corporate company. Part of the appeal that led us to AY was the ability to maintain our autonomy without the heavy corporate overburden. Plus, we're gaining the service lines that AY offers and we can offer our clients. This enhances our ability to offer best-in-class services to our clients. Also, the culture here evident in every interaction we have had with brokers and Mark Rose; they are dedicated to delivering excellent quality to clients, but they're also good people with good moral character. It's a good place to be when you've spent so much of your life working.

SAN DIEGO—More relevant to CRE than who becomes our next president is whether the Senate majority will change from Republican to Democrat, creating an all-bets-are-off scenario for our industry, Avison Young's principal and managing director of its Southern California region Chris Cooper tells GlobeSt.com. The firm recently hired Corey Martin, Stan Nowak and their agency-leasing and investment sales team in San Diego, making Martin and Nowak principals of Avison Young with a mandate to expand the firm's San Diego and Southwest Riverside Counties' industrial and office sales, leasing, and investment sales practice. In the coming months, Martin will also expand his practice into the Austin market to serve his clients' growing requirements.

We sat down with Cooper, Martin and Nowak for an exclusive chat about the San Diego market, the firm's expansion and what could impact the market going forward.

GlobeSt.com: Why is San Diego a pivotal market for your firm's expansion?

Cooper: We made an early commitment to San Diego, and we are keeping to that commitment, as the addition of this team shows. San Diego is one of the fastest-growing markets in California. This is obviously fueled by a lot of different industries, one of the biggest being biotech. Also, there are major institutional investors in San Diego, including the Irvine Co., Kilroy, some of the big pension funds and Alexandria, so we feel it's important to be part and invest in that growth.

One of the great things about Southern California is it's a very diverse economy: entertainment, white-collar service firms, aerospace and defense, education—that's why we're very bullish on San Diego and will continue to make major investments there.

GlobeSt.com: Chris, what do Corey and Stan bring to that market and the Southern California region that's unique?

Cooper: First of all, a large part of their practice is on the agency-leasing and sales side. We've made significant headway in the property-management arena—we manage more than 1 million square feet of class-A product in the San Diego area, including San Diego Tech Center and other assets—and while on our brokerage side we are very strong, on the tenant-rep side we've definitely had a hole to fill, particularly on the agency-leasing and sales side, in which Corey and Stan and their team are outstanding. Secondly, we are continuing to focus on really growing our industrial practice. We're strong in office, but we want to grow in industrial as well, and they handle both office and industrial clients, so they are a double win for us.

Martin: Over the last 12 years, my primary focus has been on office and industrial agency leasing—that's 85% to 90% of my work—from the standpoint of institutional and private-client groups. To Chris's point, with the new expansion of AY San Diego, the industrial base in San Diego has a lot of market share we can dominate, so I'm looking forward to that.

Nowak: We fill a niche within the San Diego and Inland Empire markets due to our experience and presence in agency leasing, and we've been a client rep both for end users and investment-income properties. For the last 12 years, my experience has been primarily focused on the industrial sector of the market, representing institutional-level clients all the way down to cutting my teeth on mom-and-pops. We've had clients at every level, and we're looking to expand our presence in the San Diego marketplace by coming into the San Diego office with AY.

GlobeSt.com: What leasing trends are you noticing in the San Diego market?

Cooper: I think, along the lines of what Stan just mentioned, the market has priced to a Hillary Clinton victory; however, I also believe it has priced itself to a status of equilibrium, with the Senate and House remaining in control by Republicans so an unforeseen radical agenda is not implemented. If, on the other hand, the Senate were to turn to a Democrat majority—the House won't do this; that's taking it too far—it could have a negative impact on the real estate markets that hasn't been foreseen as much; hence, the Black Swan event. Everybody talks about the political environment, but the trick to all of it is that our country has lived through a lot of shocks, but there's been a sense of political equilibrium. There was shock when Obama was in and controlled the House and Senate and could push through a radical agenda; that's what rocks the boat.

Martin: As far as the office market goes, there's been some positive growth there. There's been an upward trend in the market, but it's not real significant. Average asking rates have been flat since July at $31.30 a foot annually, and we expect that to finish the year at $31.60 a foot. The same for office vacancy: we expect a 14.6% finish. We're in an election year, so there's a bit of a sit-and-wait, see how the economy and markets respond to the election. We will see by mid-first quarter.

As for new deliveries, we've spent some time over the years absorbing excess vacancy and have seen some new deliveries on line in the coastal markets. Since 2006, La Jolla has been the fastest-growing San Diego office submarket, having added about 1.5 million square feet, and this market represents 20% of new completions in San Diego. We've seen a little growth and new deliveries, we've shrunk vacancy, and if the market responds well to the elections, there should be growth in new deliveries, which is a positive change.

Nowak: The San Diego industrial market continued to move toward historic limits since vacancy is now at an all-time low, with asking lease rates setting a new high-water mark. Positive absorption has pushed total vacancy down 20 basis points to only 4.3%, while direct vacancy fell to 3.9%, which is the lowest ever recorded. This can be partially attributed to no new industrial deliveries in Q3, though there is nearly 1 million square feet under construction with the bulk of it found in the Northwest County submarket focused in the Oceanside/Carlsbad area and South County submarket at the San Diego/Mexico border area around Otay Mesa. Sub-5% vacancy can be found in every region. Lack of supply has driven demand and has asking rates on the rise again, also setting a new all-time high average of $1.20 per square foot triple net.

I expect decreased employment-growth rates for industrial users in San Diego to weaken demand and asking rates if the current trend continues. This will also be supported by new supply of approximately 1 million square feet to be delivered in the short-term future.

Barring an unforeseen Black Swan event, I anticipate much of the same, with the current trends continuing as the data suggests. However, for the reason just mentioned, whether or not the current trajectory remains as steep may be in question. Overall, the market sentiment is very positive with a hint of cautious optimism.

GlobeSt.com: What else should our readers know about this expansion?

Cooper: You can anticipate more recruiting in San Diego and expansion in our property-management and asset services down there. We're bullish on San Diego, and there's a lot more to come.

Martin: Culture is important because we spend more time at work than we do with our families. It's not only the business we participate in, but it's the human capital that's important, too, and that has a significant positive impact. There's a high emphasis at AY on honesty and integrity.

The other thing that's extremely important is that AY is one of top two service firms globally. They maintain and foster an entrepreneurial approach to the services they provide, which is unique because when you get to the top two, the culture could be very rigid and not client centric, and that's not the case here. We service the client first, provide out-of-the-box thinking and create solutions that lead to results.

Nowak: Our team elected to make this transition to Avison Young. I'm very excited to be part of the AY team. It's an honor to be brought in as a principal of the company and to be associated with the quality of professionalism that's in this company. The fit had to be just right for us, and that led to our decision. We're coming from a smaller, independently owned franchise company that offered us autonomy, but it also lacked the high-level tools and service lines of a larger, more corporate company. Part of the appeal that led us to AY was the ability to maintain our autonomy without the heavy corporate overburden. Plus, we're gaining the service lines that AY offers and we can offer our clients. This enhances our ability to offer best-in-class services to our clients. Also, the culture here evident in every interaction we have had with brokers and Mark Rose; they are dedicated to delivering excellent quality to clients, but they're also good people with good moral character. It's a good place to be when you've spent so much of your life working.